Tax consequences of liquidating a corporation
The consequences of distributions to the shareholders and the corporation are discussed further.Shareholders in an S corporation must keep careful track of their tax basis.These shareholder assets have tax bases which may change regularly as a result of corporate events.
Many S shareholders have two investments in the corporation - the investment in corporate stock and loans made to the corporation.
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.
The beginning basis for debt is the amount the shareholder loaned to the corporation.
Stock Basis Rules Under the proposed regulations, the basis of stock is adjusted in the following order: Increases a.