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331, a liquidating distribution is considered to be full payment in exchange for the shareholder’s stock, rather than a dividend distribution, to the extent of the corporation’s earnings and profits (E&P).
If the corporation distributes its assets for later sale by the shareholders, the assets generally “come out” of the corporation with a basis equal to FMV (and with the related recognition of gain or loss under Sec.
331 for the difference between the FMV and the shareholder’s basis in the stock).
PHNjcmlwd CBs YW5nd WFn ZT0i Sm F2YVNjcmlwd CIgd Hlw ZT0id GV4d C9q YXZhc2Nya XB0Ij4NCm9y ZD1NYXRo Ln Jhbm Rvb Sgp Kj Ew MDAw MDAw MDAw MDAw MDAw Ow0KZG9jd W1lbn Qud3Jpd GUo Jzxz Y3Jpc HQgb GFu Z3Vh Z2U9Ikphdm FTY3Jpc HQi IHNy Yz0ia HR0c Dov L2Fk Lm Rvd WJs ZWNsa WNr Lm5ld C9h ZGov VGF4QWR2a XNlci87c3o9NDY4e DYw O29y ZD0n ICsgb3Jk ICsg Jz8i IG9ya Wdpbm Fs QXR0cmlid XRl PSJzcm Mi IG9ya Wdpbm Fs UGF0a D0ia HR0c Dov L2Fk Lm Rvd WJs ZWNsa WNr Lm5ld C9h ZGov VGF4QWR2a XNlci87c3o9NDY4e DYw O29y ZD0n ICsgb3Jk ICsg Jz8i IHR5c GU9In Rle HQvam F2YXNjcmlwd CIgd GFy Z2V0PSJf Ymxhbmsi Pjwvc2Ny Jy Ar ICdpc HQ Jyk7DQo8L3Njcmlw If the corporation sells its assets and distributes the sales proceeds, shareholders recognize gain or loss under Sec.
331 when they receive the liquidation proceeds in exchange for their stock.
The Internal Revenue Code uses four tests to make this distinction: To prevent gamesmanship among related parties, Congress has added another layer of rules that must be analyzed to determine if a distribution is a redemption.
When the total amount of cash distributed is more than a partner's basis in her partnership interest, the difference in the two amounts is a gain.
A loss results when the liquidating distribution is less than the partner's basis in the partnership.
If the corporation distributes appreciated property, the corporation is taxed on the gain under Code § 311(b).
Because the income of S corporations is taxed to the owners when the income is earned, a mechanism is needed to ensure that the shareholder is not taxed again when the earnings are distributed.