Differences between liquidating and nonliquidating distribution
J could distribute ,000 in cash and Tract 3 to redeem A's stock without recognizing any corporate-level gain.
The distribution may have no tax effect, or it may trigger corporate-level capital gain and/or ordinary income.
The corporate-level tax consequences of a nonliquidating corporate distribution depend on whether the distribution consists of cash or property (other than cash). The form breaks total distributions down into taxable and nontaxable categories.
331, a liquidating distribution is considered to be full payment in exchange for the shareholder’s stock, rather than a dividend distribution, to the extent of the corporation’s earnings and profits (E&P).
The shareholders generally recognize gain (or loss) in an amount equal to the difference between the fair market value (FMV) of the assets received (whether they are cash, other property, or both) and the adjusted basis of the stock surrendered.
Conversely, if it distributes appreciated property it must recognize gain as if it had sold the property to the shareholder for its FMV.
Since the corporation must compute its gains and losses on an asset-by-asset basis, H would have a recognized gain of ,000 from the land and an unrecognized loss of ,000 from the I stock, if those assets were transferred to redeem E's shares.
The corporation does not recognize gain or loss when it distributes cash to shareholders or when it redeems stock in exchange for cash payments (Sec. Avoiding Corporate-Level Gain When a corporation makes a nonliquidating distribution of corporate property other than cash (including a distribution to redeem stock), the corporation recognizes gain if the property's fair market value (FMV) exceeds its adjusted tax basis in the corporation's hands (Sec. Specifically, the corporation recognizes gain as if it had sold the appreciated property for FMV to the recipient shareholder. The portion of the corporation's gain attributable to recapture items (e.g., depreciation recapture) is ordinary income, as is gain attributable to the distribution of inventory and unrealized receivables. Form 5452, Corporate Report of Nondividend Distributions, is used to report nondividend distributions to shareholders.
When multiple properties are distributed, the corporation computes gain on an asset-by-asset basis (Rev. Gain attributable to capital assets and certain property used in a trade or business (Sec. Practice tip: Corporations generally report nonliquidating distributions to shareholders on Form 1099-DIV, Dividends and Distributions (Sec. Example 1: A, B, C, and D each own 2,500 shares of J Corp., a C corporation real estate development company.
A disagrees with the other shareholders and wants the corporation to redeem his stock for ,000.
A has held his stock for three years, and his stock basis is ,000. The corporation cannot afford to redeem the stock entirely for cash because its cash balance of ,000 must be used primarily to service real estate debt.
Structuring the redemption in this fashion would not cause any adverse tax effects for E.