Register

Distribution by former S corporation is part dividend

Distribution by former S corporation is part dividend

Friday, May 10, 2019

In Rev. Rul. 2019-13, the IRS ruled that a distribution to the sole shareholder of a C corporation was partly a recovery of the former S corporation’s accumulated adjustments account (AAA) and a taxable dividend for the remaining distribution.

The company involved was originally a C corporation that had accumulated earnings and profits (E&P) of $600x when it converted to an S corporation. (The sole shareholder held all 100 shares of stock in the corporation.) When the corporation terminated its S election, it had an AAA of $800x and continued to have the $600x of C corporation E&P.

During the corporation’s S corporation post-termination transition period, the corporation redeemed 50 of the 100 outstanding shares for $1,000x. The corporation made no other distributions during the post-termination transition period. Pursuant to Sec. 302(d), the redemption is characterized as a distribution subject to Sec. 301. For the tax period that includes the redemption, the corporation had current E&P of $400x.

The IRS ruled that if, during a former S corporation’s post-termination transition period, the corporation

distributes cash in redemption of a shareholder’s stock, which is characterized as a distribution subject to Sec. 301, the corporation should reduce its AAA to the extent of the proceeds of the redemption pursuant to Sec. 1368. Consequently, the IRS ruled that $800x of the distribution should first reduce the S corporation’s AAA under Sec. 1368 (which was not taxable) and that the remaining $200x was a taxable dividend under Sec. 301.

— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.

(Original source: link)

Recent News

IRS changes maximum-vehicle-value rule

May 09, 2019

The IRS intends to revise its regulations to make them consistent with the recent statutory changes to the automobile price inflation adjustment in Sec. 280F(d)(7), which affect the vehicle value that applies when valuing employees’ personal use of employer-provided vehicles (Notice 20…

Proposed rules would govern withholding on transfers of partnership interests

May 08, 2019

The IRS issued proposed regulations (REG-105476-18) on the operation of new Sec. 1446(f), which requires withholding on the transfer of a partnership interest described in Sec. 864(c)(8) (gain or loss of foreign persons from the sale or exchange of certain partnership interests). Sec. 1446(f…