Ab liquidating corp

Except as provided under Section 1368 (see the following discussion), the distribution will reduce the distributees` bases by the amount of any money plus the fair market value of any other property distributed.` If the S corporation has no accumulated earnings and profits, Section 1368(b) provides that a distributee shareholder will have no gain with respect to the distribution itself to the extent that the amount of the distribution does not exceed the adjusted basis of his stock. Because the distribution did not exceed the accumulated adjustments account, the shareholders recog­nize no gain on the distribution.

As with partnerships, an S corporation`s taxable gains usually pass through to its owners and avoid double taxation.Although there has been much fanfare about capital gains being taxed at the same rate as ordinary income under the Tax Reform Act of 1986 (TRA `86), Congress retained the statutory structure to allow reinstatement of the long term capital gains deduction in the future and thereby reestablish the effective rate differential.If the requirements of Section 1231 are met, the S corporation`s gain on distributions of appreciated property will be taxed as long term capital gain to the shareholder.Section 311(b)(2) mandates that the fair market value of the property for determination of gain recognition by the corporation is not less than the amount of any corporate liability assumed by the distributee in connection with the distribution.Gain Characterization and Basis Implications The character of the S corporation`s gain passes through to its shareholders under Section 1366(b).

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