Tax treatment liquidating distribution pfic
S corporations typically are more expensive to organize and require greater attention to the maintenance of corporate formalities than is required with partnerships.
However, the corporate form usually provides owners with a greater degree of insulation from business liabilities than does the partnership form.
Any ITC recapture occurring at the S corporation level will reduce its accumulated earnings and profits pursuant to Section 1371(d)(3).
Disproportionate distributions to the shareholders also cause concern.
Except as provided under Section 1368 (see the following discussion), the distribution will reduce the distributees` bases by the amount of any money plus the fair market value of any other property distributed.` If the S corporation has no accumulated earnings and profits, Section 1368(b) provides that a distributee shareholder will have no gain with respect to the distribution itself to the extent that the amount of the distribution does not exceed the adjusted basis of his stock. Because the distribution did not exceed the accumulated adjustments account, the shareholders recognize no gain on the distribution.
However, the shareholder recognizes gain (as from the sale or exchange of the stock) on the amount of the distribution in excess of the stock basis. The basis of each shareholder`s stock, assumed to be ,000, would be increased by the ,000 gain passed through to that shareholder and decreased by the ,500 distribution to arrive at an ending basis of ,500.
If the requirements of Section 1231 are met, the S corporation`s gain on distributions of appreciated property will be taxed as long term capital gain to the shareholder.Current distributions of appreciated property from S corporations produce gain at the entity level whereas distributions of such property from partnerships generally permit a deferral of taxable gain. Byrd is associated with the law firm of Petree Stockton & Robinson in Raleigh, North Carolina. S Corporation Distributions Section 1363(d) requires an S corporation to recognize gain on the distribution of appreciated property to its shareholders.No deferral of gain at the time of the distribution is available.Such distributions may indicate that more than one class of stock is involved, which could invalidate the corporation`s S election.Although regulations have not been proposed with respect to the single class of stock requirement, a pattern of discriminatory disproportionate distributions indicates that the corporation has more than one class of stock and each class has different rights with respect to the corporation`s profits and assets.