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These attribution rules provide that shares owned by a shareholder’s parents, children, and grandchildren (but not siblings) are considered to be owned by the shareholder. Similarly, shares held by corporations, trusts, and partnerships are deemed to be owned by their shareholders beneficiaries, and partners, and vice versa. As a result, shares held by these family members and entities are considered to be owned by the shareholder for purposes of determining whether the distribution qualifies as a redemption.A corporation will not recognize any gain or loss on a distribution of cash to its shareholders. But if the corporation distributes appreciated property, the corporation must recognize gain as if the property were sold to the shareholder at fair market value. Important Note: These two rules operate as a loss disallowance system.
The primary difference between C corporations and S corporations is that C corporations are taxed twice on earned income: : once at the corporate level when the income is earned, and again at the shareholder level when the income is distributed.
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.
This effectively gives the shareholder a credit to apply against the earned income when it is ultimately distributed to the shareholder, ensuring that the income is only taxed once.
The shareholder’s basis is decreased (but not below zero) by the shareholder’s share of the S corporation’s items of loss and deduction, nondeductible expenses (except expenses that are not chargeable to the capital account), depletion deduction for oil and gas property, and distributions to the shareholder that are not made from accumulated earnings and profits.
A cash distribution to a shareholder is a taxable dividend to the extent of the corporation's current or accumulated E&P. In other words, if there is sufficient current E&P to cover all distributions made during the year, all distributions are taxable dividends.
If the current E&P equals or exceeds the amount of the distribution, it is a fully taxable dividend to the shareholder even if the corporation has negative accumulated E&P (Regs. Amounts treated as taxable dividends reduce the corporation's E&P balance, but not below zero.
The rules governing distributions from C corporations differ from the rules that apply to distributions from S corporations.
To the extent that a distribution is made from the corporation’s earnings and profits, it is taxed to the shareholder as a dividend. The portion of the distribution that is not considered a dividend is applied first to reduce the shareholder’s basis in the corporation’s stock. Any remaining portion is treated as gain from the sale or exchange of property (capital gain). Important Note: If a shareholder assumes a liability or takes property subject to a liability, the amount of the distribution is reduced by the amount of the liability. Special rules also apply at the corporate level. Special rules apply to distributions to a shareholder in exchange for the shareholder’s stock (redemptions).
When property (rather than cash) is distributed, the amount of the dividend equals the fair market value (FMV) of the property on the date of the distribution, reduced by any liabilities assumed by the recipient or to which the property is subject (Sec. In addition, as is the case with cash dividends, the distribution must be from current or accumulated E&P to be classified as a dividend.
The recipient shareholder's basis in appreciated property received in a distribution equals the property's FMV (Sec. The shareholder's holding period begins on the date of distribution. The regulations are designed to harmonize the tax treatment of economically similar transactions.
Shareholders recognize a taxable dividend to the extent a distribution is paid out of corporate earnings and profits (E&P).