S corp liquidating dividend
Based on this example, we learn that timing differences between distributions will not alone cause an S Corporation to be treated as having more than one class of stock and, therefore, the validity of the S election won’t be lost.
Notice, however, that the example points out that the difference wasn’t the result of a “binding agreement relating to distribution or liquidation proceeds.” If the timing difference the result of a binding agreement, this would effectively be considered a difference in the shareholder’s rights, and the business would constructively be considered to have more than one class of stock and thus lose its S Corporation election.
In another PLR issued on the same day, another S Corporation had made disproportionate distributions to shareholders in order to help the shareholders satisfy their tax liability incurred from the income generated by the S Corporation itself.
The disproportionate distributions were made during tax years 1987 through 1991.
The following example paints a picture of a situation where business owners may consider this possibility: Tom and Jeff own an S Corporation called TJ Engineering as equal shareholders (i.e.
So going back to our example, does this mean that if Tom and Jeff were to execute their plan, the business’ S Corporation election would be terminated? The first of these examples goes as follows: S, a corporation, has two equal shareholders, A and B.Tennessee law taxes dividends from stock and Tennessee courts have defined a dividend as “return upon stock.” An S Corporation distribution is a dividend from stock and therefor is taxable.Small business owners often wonder whether it’s acceptable to make disproportionate distributions to a shareholder of an S Corporation.Differences in distributions for the sake of facilitating necessary payments to some shareholders and timing differences for other legitimate purposes won’t ruin the election, but every caution should be taken to make sure that, in the end, any disproportionate distributions are later corrected with equalizing distributions.
Furthermore and for the sake of conservatism, it’s best if S Corporations avoid disproportionate distributions where possible.In short, yes, but only so long as corrective distributions are made afterwards, and so long as the disproportionate distributions are not made pursuant to any contract, shareholder agreement, or other binding document that would go so far as to suggest that shareholders have differing rights to any distributions from the S Corporation.