What is a nonliquidating distribution
This information is essential because the tax liability of Corporation and Shareholder is based on the gain recognized from the liquidating distributions.
In a typical transaction, the gain recognized, if any, is the difference between the basis (the cost) and the fair market value of the asset being sold or distributed.
In our hypothetical, we have an S Corporation (“Corporation”) that owns a warehouse, a promissory note, and cash.
The precise tax consequences to the Corporation and its sole shareholder (“Shareholder”) are not possible to know without knowing the fair market values and bases of the Corporation’s assets.
This article discusses the tax consequences of liquidating an S Corporation that owns certain assets and describes three plans of liquidation.
In either a liquidating or a nonliquidating distribution, a distribution of cash to Shareholder will only decrease Shareholder’s stock basis by the amount of cash distributed.However, according to §453(h)(2), if Shareholder receives an installment obligation in a complete liquidation, then Shareholder’s stock basis must be allocated among all the property received by Shareholder in the liquidation.If Corporation liquidates and distributes the assets to Shareholder, then Shareholder will have to allocate Shareholder’s stock basis among all the assets received in the liquidation, including the note that will have deferred gain, which will cause Shareholder to recognize more gain on the cash and warehouse because less basis is allocated to those assets.An attempt to allocate more of the gain to the land to avoid §1239 ordinary income would come at a cost. Pursuant to §331(a), amounts received by a noncorporate Shareholder in a distribution in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock.Less gain would be allocated to the warehouse which can depreciate the cost of the warehouse over 39 years because the warehouse, pursuant to §1250, is depreciable nonresidential real property. Pursuant to §453B(a)(1), if a note is sold or exchanged, gain or loss shall result to the extent of the difference between the basis of the note and the amount realized.