S Corp Distributions - 1368

1
S Corp Distributions - 1368
No C corp EP
First - Tax free to extent of
shareholders basis in stock. Reduce basis per
1367. Second - Excess treated as gain from
the sale of stock. Yes C corp EP First -
Tax free reduction of basis to extent of AAA
(accumulated adjustment account). Second -
Taxable dividend to extent of accumulated E P.
Third - Tax free reduction in basis to extent
of remaining basis in stock. Fourth
Excess treated as gain from the sale of stock.



2
S Corp Property Distributions
1. FMV is measure of distribution to
shareholder apply normal distribution rules at
shareholder level. 2. Shareholders basis in
property is FMV. 3. S corp has gain equal to
excess of FMV over basis, which is passed through
to shareholders. 311(b) via 1371(a). 4. No loss
recognized if FMV less than basis at corporate
level. 311(a) via 1371(a).


3
Problem 910 - 1

• Basic Facts A Corp calendar year S D owns
  1/3, share basis 3k M owns 2/3, share basis 5k
  Corp has 9k net operating income, 3k LTCG.
• A Corp distributes 5k to D and 10k to M on 10/15.
  
• D 3k of ordinary income 1k LTCG. Basis
  adjusted up 4k to 7k. Basis adjustment required
  before characterizing distribution. 5k reduces
  basis to 2k.
• M 6k ordinary income 2k LTCG. Basis
  pre-distribution up to 13k after 10k
  distribution down to 3k.
• A Corp distributes 8k to D, 16k to M.
• D Pre-distribution 7k basis reduced to
  zero. 1k gain on sale of stock.
• M Pre-distribution 13k basis reduced to
  zero 3k gain on sale.

4
Problem 910 - 1

• Basic Facts A Corp calendar year S D owns
  1/3, share basis 3k M owns 2/3, share basis 5k
  Corp has 9k net operating income, 3k LTCG.
• A Corp redeems all Ds stock for 20k on 12/31.
  Basis still 7k. 13k gain recognized on sale.
• 10/15, redeem ¼ D stock for 5k, ¼ M stock for
  10k. Considered dividend because pro rata. Same
  answer as (a).
• (e) Land to D 8k FMV, 9k basis. Land to M
  16k FMV, 13k basis.
• D No loss to corp 1k of 3k gain on land
  to M increase pre-distribution basis to 8k land
  distribution reduce basis by FMV (8k) to zero. D
  basis in land 8k.
• M Corp has 3k gain, 2k allocated to M.
  Pre-distribution basis is 15k. Land distribution
  16k 1k treated as gain on stock sale. M basis
  in land is 16k.

5
Problem 910 - 1

• Basic Facts A Corp calendar year S D owns
  1/3, share basis 3k M owns 2/3, share basis 5k
  Corp has 9k net operating income, 3k LTCG.
• 12 notes distributed by A Corp, 8k FMV to D, 16K
  FMV to M. No corp gain under 311(b)(1)(A).
• D 7k pre-distribution basis zero basis
  post-distribution 1k gain on stock sale basis
  in note 8k.
• M 13k pre-distribution basis zero basis
  post-distribution 3k gain on stock sale basis
  in note 16k.

6
Problem 910 - 2

• Basic Facts P Corp new S corp, 6k accumulated
  EP from C years. O N equal shareholders O
  basis 5k, N basis 1k. P current operating income
  6k (32-18-8) and LTCG of 4k.
• Distributes 5k to each of O and N on 11/15.
• - Basis of each increased 3k plus 2k, or
  5k. O basis pre-distribution increased to 10k,
  then down to 5k post-distribution.
• - N basis pre-distribution basis to 6k,
  then reduced to 1k post-distibution.
• - P Corp accumulated adjustment account
  increased 10k for earnings (6k plus 4k) and then
  reduced 10k for distributions. Hence, zero.
• Same, but 10k each distribution. O 5k current
  accum. adj account 3k accumulated EP 2k
  reduction in basis. Basis reduced to 3k.
• N 5k accum adj. account 3k accumulated
  EP 1k basis recovery 1k gain on stock sale.
  Stock basis 0.
• P Corp accum adj account is zero.

7
Problem 910 - 2

• Basic Facts P Corp new S corp, 6k accumulated
  EP from C years. O N equal shareholders O
  basis 5k, N basis 1k. P current operating income
  6k (32-18-8) and LTCG of 4k.
• Same as (a), but P Corp also received 4k tax
  exempt interest and distributes 2k each to N and
  O.
• N Basis in stock increased to 8k (1k
  plus 5k plus 2k). 5k is distribution of accum.
  adjustment account (which not increased for
  tax-exempt interest) 2k extra distribution
  dividend of C corp earnings. N stock basis 3k.
• O Basis in stock increased to 12k (5k
  plus 5k plus 2k). 5k is distribution of accum.
  adjustment account (which not increased for
  tax-exempt interest) 2k extra distribution
  dividend of C corp earnings. N stock basis 7k.
• (d) N sells stock to R for 6k on 1/1 next year.
  10k accumulated EP. No earnings next year. Corp
  distributes 6k to R in 2/15. 5k basis recovery
  from accum adj. account picked up as Ns
  transferee. 1k dividend from C corp EP.

8
Problem 910 - 2

• Basic Facts P Corp new S corp, 6k accumulated
  EP from C years. O N equal shareholders O
  basis 5k, N basis 1k. P current operating income
  6k (32-18-8) and LTCG of 4k.
• No distribution current year. 1/1 next year
  revoke S election. 5k EP next year and 7k
  distribution to each shareholder on 8/1 next
  year.
• - Per 1371(e)(1) distributions of former
  S corp during post-termination transition
  period (1 yr after last S day) may be treated as
  basis recovery from accum. Adj. account. So,
  here 5k to each can be basis recovery (because
  that each share of 10k accum. Adjust. Acount from
  prior year) and 2k dividend.
• - Per 1371(e)(2), may elect to treat all
  as dividend. C corp EP 11k (6k prior and 5k
  current), do dividend 5.5k to each if election
  made. Extra 1.5k treated as return of capital.