Tax consequences of liquidating a corporation

A major difference between partnerships and S corpo­rations involves the treatment of distributions of ap­preciated property.With respect to the timing of gain recognition from such distributions, the rules applicable to partnerships (unlike those applicable to S corporations) generally permit gain deferral.S corpora­tions typically are more expensive to organize and require greater attention to the maintenance of corporate formalities than is required with partnerships.However, the corporate form usually provides owners with a greater degree of insulation from business liabilities than does the partnership form.In addition to taking advantage of the lower rates for indi­viduals, the pass-through entity eliminates double taxation associated with the payment of dividends from C corporations.Although both S corporations and partnerships are now tax-favored entities, there are differences between the two.The amount of gain is determined as if the S corporation had sold the property to the distributee at its fair market value.The distributee shareholder re­ceives basis in the property distributed equal to its fair market value under Section 301(d)(1).

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Current distributions of appreciated property from S corporations produce gain at the entity level whereas dis­tributions of such property from partnerships generally permit a de­ferral of taxable gain. Byrd is associated with the law firm of Petree Stockton & Robinson in Raleigh, North Carolina. S Corporation Distributions Section 1363(d) requires an S corporation to recognize gain on the distribution of appreciated property to its shareholders.

No defer­ral of gain at the time of the distribution is available.

This article demon­strates how to ensure that such distributions do not cause unexpected tax results.

As a result of the fact that the maximum corporate tax rate exceeds the maximum individual rate for the first time in seventy-three years, there is renewed interest in "pass- through" entities (i.e., S corporations and partnerships) as tax-favored ways of conducting a business.

There are subtle (and some not so subtle) differences between the two entities from a tax perspective as well.One significant difference exists with respect to distributions of appreciated property. This article previously appeared in the Tax Assessment newsletter, published by the North Carolina Bar Association, and is reprinted with permission.

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