Frequently Asked Questions
Who is eligible for the Post-Termination Transition Period Cash Distributions?
Available to shareholders of a corporation whose S-election has terminated; distributions must be in cash and made during the post-termination transition period.
How does the Post-Termination Transition Period Cash Distributions work?
Allows shareholders to receive tax-free cash distributions (to the extent of stock basis and AAA) during the period immediately following an S-election termination.
What law authorizes the Post-Termination Transition Period Cash Distributions?
The Post-Termination Transition Period Cash Distributions is authorized under IRC §1371(e) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §1371
Source: Internal Revenue Code, Title 26, United States Code
§ 1371. Coordination with subchapter C(a) Application of subchapter C rulesExcept as otherwise provided in this title, and except to the extent inconsistent with this subchapter, subchapter C shall apply to an S corporation and its shareholders.
(b) No carryover between C year and S year(1) From C year to S yearNo carryforward, and no carryback, arising for a taxable year for which a corporation is a C corporation may be carried to a taxable year for which such corporation is an S corporation.
(2) No carryover from S yearNo carryforward, and no carryback, shall arise at the corporate level for a taxable year for which a corporation is an S corporation.
(3) Treatment of S year as elapsed yearNothing in paragraphs (1) and (2) shall prevent treating a taxable year for which a corporation is an S corporation as a taxable year for purposes of determining the number of taxable years to which an item may be carried back or carried forward.
(c) Earnings and profits(1) In generalExcept as provided in paragraphs (2) and (3) and subsection (d)(3), no adjustment shall be made to the earnings and profits of an S corporation.
(2) Adjustments for redemptions, liquidations, reorganizations, divisives, etc.In the case of any transaction involving the application of subchapter C to any S corporation, proper adjustment to any accumulated earnings and profits of the corporation shall be made.
(3) Adjustments in case of distributions treated as dividends under section 1368(c)(2)Paragraph (1) shall not apply with respect to that portion of a distribution which is treated as a dividend under section 1368(c)(2).
(d) Coordination with investment credit recapture(1) No recapture by reason of electionAny election under section 1362 shall be treated as a mere change in the form of conducting a trade or business for purposes of the second sentence of section 50(a)(6).
(2) Corporation continues to be liableNotwithstanding an election under section 1362, an S corporation shall continue to be liable for any increase in tax under section 49(b) or 50(a) attributable to credits allowed for taxable years for which such corporation was not an S corporation.
(3) Adjustment to earnings and profits for amount of recaptureParagraph (1) of subsection (c) shall not apply to any increase in tax under section 49(b) or 50(a) for which the S corporation is liable.
(e) Cash distributions during post-termination transition period(1) In generalAny distribution of money by a corporation with respect to its stock during a post-termination transition period shall be applied against and reduce the adjusted basis of the stock, to the extent that the amount of the distribution does not exceed the accumulated adjustments account (within the meaning of section 1368(e)).
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