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However, state corporation statutes govern the property rights of a corporation's shareholders and creditors.
Shareholders in an S corporation must keep careful track of their tax basis.
On the other hand, a corporate distribution might not be a taxable dividend for federal income tax purposes, even if it is designated as a dividend for state-law purposes.
The winners of The Tax Adviser’s 2016 Best Article Award are Edward Schnee, CPA, Ph.
Distribution source and shareholders' basis for their corporate investment determine the tax consequences of distributions from S corporations.
The regulations being proposed under IRC Secs 13 provide the particulars of adjustments to stock basis and distributions to S corporation stockholders.
Distributions of a C corporation's own stock to its shareholders (stock dividends) are generally tax-free to the recipient shareholders (Sec. The term "stock" includes rights to acquire such stock.
Tax-free treatment apparently applies to unissued and treasury stock, as well as common, preferred, voting, or nonvoting stock.During the post-termination transition period (PTTP), any distribution of money by the corporation to its shareholders is first applied to reduce the basis of the shareholder's stock to the extent the distribution does not exceed the corporation's accumulated adjustments account (AAA) (Sec. Generally speaking, the PTTP begins on the day after the last day of the final S corporation tax year and ends on the later of one year later or the due date, including extensions, of that year's tax return. When a corporation has terminated or will terminate its S status, a distribution eliminating the previously taxed AAA should be considered, either in the final S corporation year or during the PTTP. If a distribution during the PTTP exceeds AAA, it first is considered from current C corporation E&P before being allowed as a return of stock basis.Federal income tax law governs how corporate payments to or for the benefit of shareholders are taxed for federal income tax purposes.For example, state law generally requires that dividends be declared by the board of directors.Also, dividends may be allowed only if the corporation has a positive net worth.For federal income tax purposes, state-law formalities are irrelevant.