Discussion:Property Distributions out of S-Corp

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Advanced Tax Questions --> Property Distributions out of S-Corp

Discussion Forum Index --> Tax Questions --> Property Distributions out of S-Corp

Tdinter1 (talk|edits) said:

17 February 2009
S-Corp client invests in real estate. During 2008, they distributed one of the properties equally to the owners (2 owners: 50/50 each). I understand that the distribution must be at FMV, but I'm unsure of how to report this on the 1120S.

Does anyone use CS Ultra Tax?

JR1 (talk|edits) said:

February 17, 2009
It's called a sale. If it was inventory, normal sales, costs, profit. If held for rent, 4797. If held for investment, sch. D.

Tdinter1 (talk|edits) said:

18 February 2009
But the corp didn't sell it.

I understand that there will certainly be a realized gain, but how do I report the gain AND the property distribution on the schedule K?

Kevinh5 (talk|edits) said:

18 February 2009
it is treated as a sale to the SHs, why else do you think FMV is important?

Note that if FMV has gone done, no loss is recognized

Therefore the K-1 will carry out the 'profit' and the shareholders have a new basis in the real estate. If this was depreciable real estate you've got some fun on your hands.

JR1 (talk|edits) said:

February 18, 2009
It's not a distribution as you're thinking of it, that's why I called it a sale. It's a deemed sale, and much easier to understand then.

Laketahoecpa (talk|edits) said:

18 February 2009
I understand the concept of the deemed sale but never actually had to record one on corporate books. I've been thinking about it and it seems you report the sale on corporate books but it is also recorded as distribution.

For the deemed sale, lets say property is investment land with basis of $20,000 and is worth $50,000. On the books, you would credit asset for $20,000 and credit gain for $30,000. What's the debit? I think the debit is to draw/distribution account. I think of it like the shareholder gave this phantom cash of $50,000 for deemed purchase of property to the corporation and the corporation turns around and distributes it back.

The shareholders basis would increase due to flow throuch of $30,000 gain and decrease for the $50,000 distribution - net effect is their basis is lowered by the adjusted basis of the property.

Does this make sense or am I off in left field?

Douglasholbrook (talk|edits) said:

19 February 2009
Lake, it's treated as if the Corp sold the property, distributed the cash to the shareholders, then the shareholders used the cash to purchased the property for FMV (see "Kenen" transfer).

Kevin, it looks like the loss could have been recognized as the property was distributed pro rata to the shareholders.

336(d) Limitations on recognition of loss

     (1) No loss recognized in certain distributions to related
       (A) In general
         No loss shall be recognized to a liquidating corporation on
       the distribution of any property to a related person (within
       the meaning of section 267) if -
           (i) such distribution is not pro rata,

Tdinter1 (talk|edits) said:

20 February 2009
Thanks for the advice! I needed a couple of days to absorb the information, so I think I know what to do now.

Thanks again!

Harry Boscoe (talk|edits) said:

20 February 2009
I think 336(d) would apply to a "liquidating corporation" but I think this thread isn't about that. The title of Section 336 is "Gain or loss recognized on property distributed in complete liquidation" n'est-ce pas? It's noon and there's beer in the fridge...

Douglasholbrook (talk|edits) said:

21 February 2009
Harry, you're right. I missed that nuance. thank you, sir.

Tdinter1 (talk|edits) said:

27 May 2009
Does the treatment of a property distribution differ for a partnership (LP)?

What if the property was received in a like-kind exchange?

Southparkcpa (talk|edits) said:

27 May 2009
I believe it is a distribuition at FMV diff between FMV and basis is taxable gain. So land with cost basis 100, FMV 150....

credit land 100 credit gain on sale/transfer 50 debit distribution 150

Harry Boscoe (talk|edits) said:

27 May 2009
1.) Does the treatment of a property distribution differ for a partnership (LP)?

You better believe it! Totally different, like, the Code sections that apply to partnerships don't even start with the same digit as the ones that deal with corporate distributions.

2.) What if the property was [had been?] received in a like-kind exchange?

If that's the case, I would strongly suggest that the property had better be held for use in a trade or business or for investment. Are you thinking there would be different rules for the taxation of a distribution from a partnership depending on whether the distributed property had been acquired, earlier, by the partnership in an exchange that satisfied the Section 1031 requirements?

Tdinter1 (talk|edits) said:

28 May 2009

Yes, the property had been acquired in an LKE a couple of years ago.

The IRS pub I read describes how you would treat distributions or property originally contributed by the partners, but I don't know if that technically applies in this situation since the property was acquired in an LKE.

Since it was acquired in an LKE, you suggest they keep it in the business or as an investment. Is this per the code? Or your personal advice? I'm not questioning you, I just like substantiation for things that come out of the code.

Can you refer me to the section that describes in super duper detail partnership distributions?

Thanks so much!

Riley2 (talk|edits) said:

28 May 2009
704(c)(1)(B) applies to distributions of contributed property within 7-years.

737 applies if the receiving partner has contributed other appreciated property to the partnership within the past 7-years.

If the 2 preceding sections do not apply, gain is limited by Sec. 731.

Tdinter1 (talk|edits) said:

28 May 2009
Since the property wasn't "contributed", but acquired in an LKE, does this situation fall under Section 731?

I've been reading and re-reading 704 and 737, and, like I mentioned before, it refers to the distributions as "contributed property".

Or, is the fact that the property was acquired in an LKE irrelevant; is it treated as if it were contributed by the partner(s) (based on his/her % of ownership)?

Bleh, so confusing.

Harry Boscoe (talk|edits) said:

28 May 2009
Here's some IRC stuff about distributions from a partnership

Subpart B - Distributions by a Partnership

Sec. 731. Extent of recognition of gain or loss on distribution

Sec. 732. Basis of distributed property other than money

Sec. 733. Basis of distributee partner's interest

Sec. 734. Adjustment to basis of undistributed partnership property where section 754 election or substantial basis reduction

Sec. 735. Character of gain or loss on disposition of distributed property

Sec. 736. Payments to a retiring partner or a deceased partner's successor in interest

Sec. 737. Recognition of precontribution gain in case of certain distributions to contributing partner

When I wrote that the exchanged property had better "be held for use in a trade or business or for investment" I was just being cute. That's a *necessary* condition for the like-kind exchange rule of Section 1031 to have applied to the exchange.

Riley2 (talk|edits) said:

28 May 2009
Tdinter, Sec. 737 applies to any partner who receives a distribution of property if he has ever contributed appreciated property to the partnership (other than the distributed property). Thus, even though the distributed property was never contributed, Sec. 737 may apply anyway.

Tdinter1 (talk|edits) said:

29 May 2009
So, given that the property was acquired in an LKE, does this mean it can't be distributed? Or does it mean that it can be distributed, but the partner MUST continue to use the property for investment purposes only?

Riley2 (talk|edits) said:

29 May 2009
You have 2 separate issues here.

The first issue is whether the receiving partner has contributed other property to the partnership within the last 7 years. If so, there may be a Sec. 737 gain to report on the distribution of the property acquired in the 1031 exchange.

The second issue is that, under 1031, the partnership must hold the property for business or investment purposes before it distributes the property to any of its partners. If the partnership has held the property for at least 2 years, I would say that this requirement has been satisfied.

Tdinter1 (talk|edits) said:

29 May 2009
Issue number 1: I don't think they've "contributed" property in the traditional sense of the word. I'll have to double check, but I believe the only contributions have been in the form of capital in the past 7 years. If after double checking this is true, then section 731 applies, correct?

Issue number 2: Yes, the property has been held for at least two years, so that answers that question.

Thanks Riley.

To join in on this discussion, you must first log in.
Personal tools