Corporate nonliquidating

To the extent that a distribution is made from the corporation’s earnings and profits, it is taxed to the shareholder as a dividend.[1] The portion of the distribution that is not considered a dividend is applied first to reduce the shareholder’s basis in the corporation’s stock.[2] Any remaining portion is treated as gain from the sale or exchange of property (capital gain).[3] Important Note: If a shareholder assumes a liability or takes property subject to a liability, the amount of the distribution is reduced by the amount of the liability.[4] Special rules also apply at the corporate level.[5] Special rules apply to distributions to a shareholder in exchange for the shareholder’s stock (redemptions).Instead of being treated as dividends, redemptions are treated as a sale or exchange of the stock by the shareholder.[6] The distinction can be important when the long-term capital gains rates (which apply to redemptions) are higher than the tax rates on dividends.

corporate nonliquidating-5

The primary difference between C corporations and S corporations is that C corporations are taxed twice on earned income: : once at the corporate level when the income is earned, and again at the shareholder level when the income is distributed.

The rules governing distributions from C corporations differ from the rules that apply to distributions from S corporations.

The result would be similar if Madison is a regular corporation, except that the tax would have to be paid at the corporate level.

However, in this case there would be a second tax at the shareholder level.

The proposals list an ordering rule for the adjustment, either increases or decreases, of stock basis.

They also include provisions on the timing of basis adjustments, basis computations during a loss year, computation of individual stock basis and the categorization of debt as basis.

The truck has been depreciated so that is adjusted basis for tax purposes is now ,500. Madison distributes the truck to its sole shareholder.

Madison must recognize a ,000 gain (all ordinary income).

Under the Internal Revenue Code of 1954, the corporation is aseparate taxable entity, so that corporate income is taxed to thecorporation and dividends paid by the corporation are taxable to theshareholders.

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