Chapter 18 corporate taxation nonliquidating distributions
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This is done through a system of rules that track and adjust the shareholder’s stock basis.
While there are some differences, the S corporation basis system is similar to the rules that apply to partnerships.
The Internal Revenue Code uses four tests to make this distinction: To prevent gamesmanship among related parties, Congress has added another layer of rules that must be analyzed to determine if a distribution is a redemption.Instead of being treated as dividends, redemptions are treated as a sale or exchange of the stock by the shareholder. The distinction can be important when the long-term capital gains rates (which apply to redemptions) are higher than the tax rates on dividends.Corporate shareholders may prefer that the distribution be treated as a dividend, allowing the corporation to take advantage of the special dividends-received deduction under Code § 243 (which allows the dividends to only be taxed once at the corporate level).When a corporation makes a nonliquidating distribution to a shareholder, the shareholder must answer the following three questions: What is the amount of the distribution?Mc Graw-Hill’s Taxation of Individuals is organized to emphasize topics that are most important to undergraduates taking their first tax course.