What is a liquidating distribution
In essence, the ordering rule allows shareholders to "borrow" basis from anticipated net income at the end of the year while receiving distributions during the taxable year.
Since adjustments to basis are made at the end of the year, the shareholder's basis at the time of the distribution is irrelevant. These rules limiting losses and allowing tax-free distributions up to the amount of the shareholder's adjusted basis are similar in certain respects to the rules governing the treatment of losses and cash distributions by partnerships.
The Timing of Basis Adjustments All basis adjustments are deemed to occur on the last day of the corporation's tax year or on the date the shareholder sells his or her stock, if earlier.
Income and loss items affect basis first, followed by distributions.
Basis Computations During a Loos Year A net loss (not including distributions) first reduces the basis for stock, and then reduces the basis of debt owed to the shareholder by the corporation, if any.
Under the proposed regulations, a shareholder's stock basis at the end of a current year that is available to absorb losses is increased by the amount of the shareholder's share of the corporation's separately and non-separately stated income items.
Stock Basis Rules Under the proposed regulations, the basis of stock is adjusted in the following order: Increases a.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.However, if losses occur subsequent to the distribution, and those losses result in a net loss for the taxable year, the distribution (which the shareholder anticipated to be tax- free) could be converted into a taxable distribution. Under the partnership rules, however (unlike the S corporation rules), for any taxable year, a partner's basis is first increased by items of income, then decreased by distributions, and finally is decreased by losses for that year. Giant, Inc., an S Corporation, has only one shareholder, Linda Fath.Linda had a 7,000 stock basis at the beginning of 1992.
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The shareholder's oil and gas depletion deduction; c. Non- separately computed losses that pass through; and e. Reducing stock basis for non-deductible items prevents a shareholder from converting a non-deductible expense at the corporate level into a deductible expense when stock is sold or a liquidating distribution is received.