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.These shareholder assets have tax bases which may change regularly as a result of corporate events.The beginning basis for stock is the amount the shareholder invested to obtain the stock.
The regulations being proposed under IRC Secs 13 provide the particulars of adjustments to stock basis and distributions to S corporation stockholders.The amount of the tax basis determines the tax treatment of such items as flow-through losses and corporate distributions.Many S shareholders have two investments in the corporation - the investment in corporate stock and loans made to the corporation.To the extent that a distribution is made from the corporation’s earnings and profits, it is taxed to the shareholder as a dividend. 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. Any remaining portion is treated as gain from the sale or exchange of property (capital gain). 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. Special rules also apply at the corporate level. 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. The distinction can be important when the long-term capital gains rates (which apply to redemptions) are higher than the tax rates on dividends.