Liquidating limited partnerships
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.A major difference between partnerships and S corporations involves the treatment of distributions of appreciated property.
If the requirements of Section 1231 are met, the S corporation`s gain on distributions of appreciated property will be taxed as long term capital gain to the shareholder.
However, Section 1231 excludes from capital gain treatment any inventory or property held primarily for sale in the ordinary course of the corporation`s trade or business.
In addition, Sections 12 require that any depreciation recapture inherent in the gain be reclassified as ordinary income.
However, Section 1374 may impose a corporate-level tax on "built-in gains" on property dispositions by corporations that convert from C to S status after 1986 (unless the exception for certain small corporations converting to S status before 1989 applies).
Section 1375 may impose a corporate-level tax on passive investment income, which includes gains on some distributed appreciated property, if the corporation has accumulated earnings and profits. X, an S corporation, has earnings and profits of 0,000 and an accumulated adjustments account of ,000.
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Basis adjustments to shareholders` stock are determined under Section 1367(a). If X distributes undivided interests in appreciated property worth $50,000 (with a basis of $10,000) pro rata to its four 25 percent shareholders. The four shareholders each receive a basis in the distributed property of $12,500.