What is a nonliquidating distribution
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.
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.
If Shareholder’s stock basis is large enough, Corporation can liquidate and incur no tax liability because Shareholder’s stock basis will not be depleted, only reduced, in the liquidating distributions.
In general, pursuant to §336, unless the liquidation is part of a reorganization plan, gain or loss is recognized to a liquidating corporation upon the distribution of property in complete liquidation as if the property were being sold to the distributee at its fair market value.
Pursuant to §167, a warehouse is depreciable property.
Pursuant to §336(a), a distribution in a complete liquidation of a corporation is treated as if the distributed property were sold to the distributee.
Pursuant to §453(h)(1), if, in a liquidation to which §331 applies (pertaining to gain or loss to shareholders in complete liquidation of a corporation), Shareholder receives (in exchange for Shareholder’s stock) a note acquired in respect of a sale or exchange by Corporation during the 12-month period beginning on the date a plan of complete liquidation is adopted and the liquidation is completed during such 12-month period, then the receipt of payments under such note (but not the receipt of such note) by Shareholder shall be treated as the receipt of payment for the stock.
If Corporation distributes the note to Shareholder in a complete liquidating distribution and Shareholder receives the note in exchange for Shareholder’s stock within 12 months of Corporation adopting a plan of liquidation and the liquidation is completed within that 12-month period, then Shareholder’s receipt of the note is not treated as a receipt of payment for Shareholder’s stock; instead, Shareholder’s receipt of the payments on the note is treated as receipt of payment for Shareholder’s stock and he would not owe any taxes on the note until Shareholder actually receives each payment.