S corp liquidating dividend
Most dividends (as opposed to distributions) paid by an S corporation will be treated as “qualifying dividends” subject to the current maximum federal income tax rate of 15%.
To the extent the distribution exceeds the amount of the company’s E&P from prior C corporation years, then the excess will be treated first as a tax-free return of any remaining portion of the shareholder’s tax basis in his stock and then as capital gain.
After the redemption, Peter will own 30% of the 900 shares of remaining company stock outstanding, so he meets the substantially disproportionate test of IRC Section 302.
Section 302 of the Internal Revenue Code (IRC) governs a corporation’s stock redemptions.
This section considers a redemption to be either a “sale or exchange” or a “distribution,” and, depending on the form applied to the transaction, it will have different tax consequences to the taxpayer as well as the company.
In the S corporation context, however, this is not always the case. Peter owns 40% of the S corporation’s 1,000 shares of outstanding common stock, or a total of 400 shares of the company’s common stock, which he has owned for several years.
His basis in those shares is ,000,000, or ,000 a share.If the S corporation has no undistributed E&P from prior C corporation years, then the distribution will be treated first as a tax-free return of the selling shareholder’s tax basis and then as capital gain.