What is a nonliquidating distribution
However, if the stock basis is depleted before Corporation distributes all of its assets, then any subsequent distributions will result in taxable gain to the extent that there is gain recognized in those subsequent distributions.
In either a liquidating or a nonliquidating distribution, a distribution of cash to Shareholder will only decrease Shareholder’s stock basis by the amount of cash distributed.
When appreciated, depreciable real property is distributed, any gain recognized is allocated between the land and the property.
Pursuant to §1239, any gain allocated to the land is taxed as capital gain and any gain allocated to the property is taxed as ordinary income. will challenge the disproportionate allocation of gain as an attempt to game the system.
Any gain or loss shall be considered as resulting from the sale or exchange of the property in which the note was received.
However, there is a way we can postpone gain recognition to Shareholder in the distribution of the note.
In our hypothetical, we have an S Corporation (“Corporation”) that owns a warehouse, a promissory note, and cash.
The precise tax consequences to the Corporation and its sole shareholder (“Shareholder”) are not possible to know without knowing the fair market values and bases of the Corporation’s assets.
Due to the tax treatment of a non-liquidating distribution of a note, it may be advisable for Corporation to distribute the note before it distributes the warehouse in a liquidating distribution.
Pursuant to §453B(a)(2), if a note is distributed, gain or loss shall result to the extent of the difference between the basis of the obligation and the fair market value of the obligation at the time of distribution.