Liquidating vs nonliquidating distributions partnerships

The tax consequences of distributions by an S corporation to a shareholder depend on the shareholder’s basis in the S corporation stock.

Distributions to the shareholder are not included in the shareholder’s gross income to the extent that the distribution does not exceed the shareholder’s basis in the stock.

Partners, however, can only take a loss on their returns if it's solely the result of a liquidating distribution of cash, outstanding partnership receivables or inventory items.

If the partnership distributes property -- anything other than cash and property treated as cash -- during its liquidation, it has no immediate tax effect.

While there are some differences, the S corporation basis system is similar to the rules that apply to partnerships.

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331 when they receive the liquidation proceeds in exchange for their stock.

When the total amount of cash distributed is more than a partner's basis in her partnership interest, the difference in the two amounts is a gain.

A loss results when the liquidating distribution is less than the partner's basis in the partnership.

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