Question

Last year, Miley decided to terminate the S corporation election of her solely owned corporation on October 17, 2016 (effective immediately), in preparation for taking it public. At the time of the election, the corporation had an accumulated adjustments account balance of $150,000 and $450,000 of accumulated E&P from prior C corporation years, and Miley had a basis in her S corporation stock of $135,000. During 2017, Miley’s corporation reported $0 taxable income or loss. Also, during 2017 the corporation made distributions to Miley of $80,000 and $60,000.

How are these distributions taxed to Miley assuming the following? (Leave no answer blank. Enter zero if applicable. Enter N/A if not applicable.)

a. Both distributions are in cash, and the first was paid on June 15, 2017, and the second on November 15, 2017.

Answer 1

The June 15 distribution is not taxable. Since it is not taxable to the extent of the corporation's accumulated adjustment account ($150,000) and Miley's stock basis ($135,000), therefore the distribution is during the post-termination period.

Because second distribution is after the end of PTTP (it ends on October 17, 2017) the distribution is considered as distribution out of earnings and profits. Hence, Miley should recognize a $60,000 dividend on the November 15th distribution.