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A shareholder’s basis in his S corporation stock is increased by the share of the S corporation income that is passed through to the shareholder.
This effectively gives the shareholder a credit to apply against the earned income when it is ultimately distributed to the shareholder, ensuring that the income is only taxed once.
Eventually, company officers learned of their plight and reincorporated the business in the same state.
At issue is whether the company’s status as a corporation had been terminated by the administrative dissolution. Something else to consider is that under Section 336(a) of the tax code, a gain or loss is recognized by a liquidating corporation on the distribution of its property in complete liquidation, as if such property were sold to the distributee at its fair market value. 142 ) states that “…where a corporation ceases business operations, has retained no assets, has no income, and has actually liquidated, there is in effect a de facto dissolution, even though the corporation has not been formally dissolved…” In addition, it is entirely possible for the corporation to continue in existence even though it has been, as a matter of state law, dissolved.
This helps ensure that the shareholder only benefits once from reductions in income earned by the S corporation.If the corporation distributes the assets in kind to a shareholder pursuant to a plan of liquidation, it is treated as having sold the assets to the shareholder for fair market value.Either way, the corporation will recognize gain or loss to the extent that the amount realized (or the property’s value) differs from the corporation’s basis in the distributed asset.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.