Category: Corporations Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Regarding your query as to the treatment of distributions of previously taxed income from a terminated S corporation, I offer the following comments. Under Section 1371(e)(1), there is a window of time after the termination of an S election during which amounts previously taxed can be withdrawn (in cash) without further tax consequences. This window is called the "post termination transition period". Section 1377(b). The period begins on the last day of the S corporation's last S corporate year and ends on the later of the following: 1. one year after such last day; 2. the due date, including extensions, of the tax return for the last S corporate year; or 3. 120 days after a determination that the S election has been terminated for a previous year. If your situation fits within the time frame set forth above, the entire AAA balance can be paid in cash to the shareholders without further tax consequences (assuming such distributions do not exceed stock basis). If your situation does not fit within the time frame above, the normal corporate distribution rules apply. Under these rules, a distribution would be taxable as a dividend to the extent of the corporation's current or accumulated earnings and profits (E&P). If the corporation does not have current or accumulated E&P, the distribution is treated as a tax-free return of capital to the extent of the shareholder's stock basis. Any amounts distributed in excess of basis are treated as proceeds from the sale or exchange of the shareholder's stock. Presumably your client has no accumulated E&P, but note that distributions are treated as dividends to the extent of current or accumulated E&P. Accordingly, if your client has E&P for the tax year in which the distribution is made, the distribution would be treated as a dividend to the extent of that E&P. Note also that the measurement of E&P is different from the measurement of both taxable income and book income. Also, if your client claims to make a nontaxable distribution by reason of no E&P, there is a rather onerous filing responsibility to prove that no E&P exists. The filing, on Form 5452, is due with the tax return which includes the distribution alleged to be tax-free. If you find that your client is required to file Form 5452, I would be happy to assist you since I have significant experience in this area. |
