If the sale and distribution occur in the same year but the sale of the asset results in ordinary income, the shareholder may report some or all of the asset sale as ordinary income, which cannot be offset against a capital loss recognized when the proceeds from the sale are distributed. 38 property) contained a similar exception, but the underlying regulations added that for the exception to apply, the transferee’s basis in the property must be determined by reference to the transferor’s basis (Regs.
recognizes a $45,000 gain on Block 1 ($45,000 – $0 basis) and an $80,000 gain on Block 2 ($90,000 – $10,000 basis).
The character of gain or loss recognized by the S shareholder depends on whether the stock is a capital asset in the shareholder’s hands and whether the transaction constitutes a complete or a partial liquidation of the corporation.
This can result in the shareholders reporting more than 12 months of passthrough income in a single year.
For example, if an S corporation with an April 30 year end makes its final liquidating distribution on October 31, 2007, the shareholders will report 18 months of passthrough items on their 2007 returns.
1244 stock, the shareholder may be able to claim an ordinary loss rather than a capital loss. Since the existence of AE&P has no impact on the characterization of a liquidating distribution, an S corporation with AE&P should identify liquidating distributions as such (for example, in a board of directors resolution adopting the plan of complete liquidation).
Distributions in complete liquidation of an S corporation are treated as payments in exchange for the shareholder’s surrendered stock (Sec. In addition, during the liquidation of an S corporation, it may be difficult to predict the ending balance of AAA.
recognizes no gain or loss on Block 2 (,000 – ,000 basis) and has a remaining basis of ,000 in Block 2.
The 2008 distribution is allocated ,000 to Block 1 (10 ÷ 30 × 5,000) and ,000 to Block 2 (20 ÷ 30 × 5,000).
This may in turn make it difficult to accurately determine the AAA available for ordinary distributions and makes inadvertent dividend distributions from AE&P more likely to occur.