Reporting liquidating distributions
Long-term or short-term classification of a liquidation that qualifies for capital gain treatment depends on the shareholder’s holding period, with long-term status having significant importance due to the 15% tax rate cap on long-term capital gains.Shareholders in the 35% tax bracket achieve a 57.1% ((35% – 15%) ÷ 35%) tax savings on capital gain versus ordinary income.While claimed over a 10-year period, compliance with the statutory criteria must be met over a 15-year “compliance period” (Sec. The LIHC is subject to recapture if any interest in the building (including stock owned in an S corporation that owns the building) is disposed of during the compliance period. Alternatively, the shareholders can pledge Treasury securities in lieu of a surety bond (Rev. The liquidation of an S corporation that has passed through the LIHC to its shareholders, and the distribution of the low-income housing property (or proceeds from its sale) to the shareholders, appear to result in recapture. 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.
1368 distribution allows full stock basis offset at the shareholder level, while sale or exchange treatment allows only part of the shareholder’s stock basis to offset the distribution.
The shareholder’s basis in assets received is their FMV at the time of the distribution.
Basis is not affected by the shareholder’s assuming corporate liabilities or receiving corporate property that is subject to a liability (Sec. A distribution in partial liquidation of the S corporation will also qualify for sale or exchange treatment under Sec.
For example, the low-income housing credit (LIHC) authorized by Sec. A reduction in stock ownership triggers recapture when the shareholder’s interest falls below two-thirds, and then one-third, of what it was in the year the S corporation placed the investment credit property in service (Sec.
42 is a business tax credit for residential rental property that qualifies as low-income housing under detailed statutory criteria.