Liquidating and nonliquidating distribution

[ILLUSTRATION OMITTED] NONLIQUIDATING CORPORATE DISTRIBUTIONS are distributions of cash and/or property by a continuing corporation to its shareholders.

At the shareholder level, a nonliquidating corporate distribution can produce a variety of tax consequences, including taxable dividend treatment, capital gain or loss, or a reduction in stock basis.

E does not care what assets she receives as long as they have a total value of 5,000. However, the shareholders have agreed to distribute a parcel of land held for investment purposes and stock in a publicly traded company, I, Inc., to redeem E's shares.

The land has an FMV of 5,000 and basis of 0,000, while the stock has an FMV of ,000 and basis of ,000.

A does not care which tract of land he receives in redemption of his stock because he plans to sell the land immediately.

The other shareholders feel that the tracts will appreciate at about the same rate, so they are willing to distribute any of the tracts. If J distributes Tract I or Tract 2 to A to redeem his stock, the corporation must recognize a ,000 gain.

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Since all of A's shares would be redeemed, and because he is unrelated to the remaining shareholders, the redemption would qualify for stock sale (capital gain) treatment as a complete termination of a shareholder's interest under Sec. A's basis in the stock is ,000, so he would recognize a

Since all of A's shares would be redeemed, and because he is unrelated to the remaining shareholders, the redemption would qualify for stock sale (capital gain) treatment as a complete termination of a shareholder's interest under Sec. A's basis in the stock is $59,000, so he would recognize a $1,000 long-term capital gain from the redemption.

His basis in the land would equal its FMV on the date of distribution, or $600,000. Recognizing Corporate-Level Loss Unfortunately, a corporation cannot recognize a tax loss on a nonliquidating distribution of depreciated property (i.e., where the property's FMV is less than the adjusted basis).

A corporation is generally allowed to recognize tax losses when depreciated property is distributed to shareholders in complete liquidation of the corporation (Sec. Example 2: Assume that H, Inc., is a C corporation that is equally owned by E, F, and G, who are not related in any way. Because of disputes regarding F's and G's salaries, E wants the corporation to redeem her stock (which has a basis of $150,000).

Since the corporation must compute its gains and losses on an asset-by-asset basis, H would have a recognized gain of $25,000 from the land and an unrecognized loss of $20,000 from the I stock, if those assets were transferred to redeem E's shares.

Instead of distributing the I stock, the corporation should sell it and distribute the resulting sales proceeds to E.

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Since all of A's shares would be redeemed, and because he is unrelated to the remaining shareholders, the redemption would qualify for stock sale (capital gain) treatment as a complete termination of a shareholder's interest under Sec. A's basis in the stock is $59,000, so he would recognize a $1,000 long-term capital gain from the redemption.His basis in the land would equal its FMV on the date of distribution, or $600,000. Recognizing Corporate-Level Loss Unfortunately, a corporation cannot recognize a tax loss on a nonliquidating distribution of depreciated property (i.e., where the property's FMV is less than the adjusted basis).A corporation is generally allowed to recognize tax losses when depreciated property is distributed to shareholders in complete liquidation of the corporation (Sec. Example 2: Assume that H, Inc., is a C corporation that is equally owned by E, F, and G, who are not related in any way. Because of disputes regarding F's and G's salaries, E wants the corporation to redeem her stock (which has a basis of $150,000).Since the corporation must compute its gains and losses on an asset-by-asset basis, H would have a recognized gain of $25,000 from the land and an unrecognized loss of $20,000 from the I stock, if those assets were transferred to redeem E's shares. Instead of distributing the I stock, the corporation should sell it and distribute the resulting sales proceeds to E.

,000 long-term capital gain from the redemption.His basis in the land would equal its FMV on the date of distribution, or 0,000. Recognizing Corporate-Level Loss Unfortunately, a corporation cannot recognize a tax loss on a nonliquidating distribution of depreciated property (i.e., where the property's FMV is less than the adjusted basis).A corporation is generally allowed to recognize tax losses when depreciated property is distributed to shareholders in complete liquidation of the corporation (Sec. Example 2: Assume that H, Inc., is a C corporation that is equally owned by E, F, and G, who are not related in any way. Because of disputes regarding F's and G's salaries, E wants the corporation to redeem her stock (which has a basis of 0,000).Since the corporation must compute its gains and losses on an asset-by-asset basis, H would have a recognized gain of ,000 from the land and an unrecognized loss of ,000 from the I stock, if those assets were transferred to redeem E's shares. Instead of distributing the I stock, the corporation should sell it and distribute the resulting sales proceeds to E.

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