The shareholder will recognize gain or loss equal to the difference between the amount of the distribution and the shareholder’s basis in the S corporation stock.Note that these rules differ from the ordinary rules applicable to distributions from S corporations.Distributions to the shareholder are not included in the shareholder’s gross income to the extent that the distribution does not exceed the shareholder’s basis in the stock.Because the tax consequences of distributions depend on the shareholder’s basis, it is important to keep up with changes in the shareholder’s basis over time.
If the S corporation distributes appreciated property to a shareholder, the corporation must recognize gain as if the property were sold to the shareholder at fair market value.S corporations with accumulated earnings and profits should take advantage of this distinction by clearly identifying liquidating distributions in the documents authorizing the liquidation.This allows partners to defer recognition of gain in appreciated property that they receive from the partnership.In contrast, distributions of appreciated property by C corporations and S corporations are treated as though the property were sold to the shareholder at fair market value. 720-2nd, Partnership Transactions—Section 751 Property, analyzes the federal income tax consequences of (1) a sale or exchange of a partnership interest where the partnership owns a §751(a) property (i.e., unrealized receivables and inventory items) and (2) a distribution from a partnership owning §751(b) property (i.e., unrealized receivables and inventory items which have appreciated substantially in value) where such distribution has the effect of changing the proportionate interests of the partners in the §751(b) property. Partnership Distributions of Partnership Interests 6. Partnership Mergers, Consolidations, Divisions, and Conversions a. Review of Overall Results of the Application of § 751(b) F. Step 2: Classify Each Partnership Asset Subject to § 751(b) as an Item of § 751(b) Property or an Item of Other Property 4.