Liquidating vs nonliquidating distributions
By virtue of these provisions, a corporate distribution is a "dividend"that must be included in gross income under § 301 (c) (1) and§ 61 (a) (7) if, and to the extent that, it comes out of "earnings andprofits" of the corporation accumulated after February 28, 1913 or outof earnings and profits of the taxable year.Most distributions of mostcorporations fall well within this category of taxable "dividends" andhence are taxed as ordinary income to the shareholder, subject to the exclusion of § 116 and the 4 percent dividends received credit of§ 34 if the shareholder is an individual or to the 85 percent dividendsreceived deduction of § 243 if the shareholder is a corporation.Distributions, usually liquidating distributions, are important components of major partnership restructurings, including divisions, mergers, incorporations, and changes in legal form. Transfers After December 14, 1999 (1) Allocations Between Asset Classes (2) Allocations Within Asset Classes (3) Increases (4) Decreases (5) Special Rule for Stock of Corporate Partners: 755(c) (6) Requirement that Difference Between Value and Basis Be Reduced b. Timing of Basis Adjustments Caused by Liquidation of Partner's Interest 4.
Although both S corporations and partnerships are now tax-favored entities, there are differences between the two.
Tothe extent that a distribution by a corporation is not covered by currentor post-1913 earnings and profits, however, it is treated by§ 301(c)(2) as a return of capital to the shareholder, to be appliedagainst and in reduction of the adjusted basis of his stock.
If thedistribution exceeds the adjusted basis of the stock, the excess isordinarily taxed as capital gain, with an exception of minor importancefor distributions out of increase in the value of corporate propertyaccrued before March 1, 1913.
Under the Internal Revenue Code of 1954, the corporation is aseparate taxable entity, so that corporate income is taxed to thecorporation and dividends paid by the corporation are taxable to theshareholders.
The framework for the taxation of corporate distributionsis provided by Sections 301 (a), 301 (c), and 316 of the Code.