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This may in turn make it difficult to accurately determine the AAA available for ordinary distributions and makes inadvertent dividend distributions from AE&P more likely to occur.
If the S corporation has AE&P, the shareholders may want to forgo distributions prior to commencement of the liquidating distributions, because once the AAA is exhausted, preliquidation distributions are treated as dividend income to the extent of AE&P.
If the sale and distribution occur in the same year but the sale of the asset results in ordinary income, the shareholder may report some or all of the asset sale as ordinary income, which cannot be offset against a capital loss recognized when the proceeds from the sale are distributed. 38 property) contained a similar exception, but the underlying regulations added that for the exception to apply, the transferee’s basis in the property must be determined by reference to the transferor’s basis (Regs. Thus, liquidation within five years of placing the property in service will result in recapture even if the distributee shareholders continue to conduct the business of the liquidated corporation ( State audits of abandoned and unclaimed property (AUP) have exploded in recent years.
If the shareholder assumes known corporate liabilities or receives corporate property subject to a liability (such as the distribution of mortgaged land), the amount realized is reduced by the amount of the liability (Ford, 311 F2d 951 (Ct. It appears that the adjusted basis of stock held in a liquidating corporation is adjusted for current-year passthrough items prior to determination of gain or loss from the receipt of the liquidating distributions (see Regs. The 2007 distribution is allocated the same as before.For example, the low-income housing credit (LIHC) authorized by Sec. A reduction in stock ownership triggers recapture when the shareholder’s interest falls below two-thirds, and then one-third, of what it was in the year the S corporation placed the investment credit property in service (Sec. 42 is a business tax credit for residential rental property that qualifies as low-income housing under detailed statutory criteria. While claimed over a 10-year period, compliance with the statutory criteria must be met over a 15-year “compliance period” (Sec. The LIHC is subject to recapture if any interest in the building (including stock owned in an S corporation that owns the building) is disposed of during the compliance period. Alternatively, the shareholders can pledge Treasury securities in lieu of a surety bond (Rev. The liquidation of an S corporation that has passed through the LIHC to its shareholders, and the distribution of the low-income housing property (or proceeds from its sale) to the shareholders, appear to result in recapture.