Pro rata liquidating distribution

Posted by / 24-Oct-2020 20:08

Well, the simple answer is no, but there are possibilities for “timing differences” between distributions.First, let’s explain why disproportionate distributions would be disallowed.Notice, however, that the example points out that the difference wasn’t the result of a “binding agreement relating to distribution or liquidation proceeds.” If the timing difference the result of a binding agreement, this would effectively be considered a difference in the shareholder’s rights, and the business would constructively be considered to have more than one class of stock and thus lose its S Corporation election.Several private letter rulings also give some examples where temporarily disproportionate distributions have been allowed.Tom and Jeff wonder whether they can make a cash distribution of 5,000 to Tom, but no distribution at all to Jeff, leaving the remaining retained earnings available to the business and thus satisfying the desires of both shareholders.So based on this example, the question really is whether an S Corporation can make distributions to select shareholders that are disproportionate to the shareholders’ ownership interest.each shareholder owns 50% of the stock of the S Corporation).

These rules are found in Internal Revenue Code Section 1361.S distributes ,000 to A in the current year, but does not distribute ,000 to B until one year later.The circumstances indicate that the difference in timing did not occur by reason of a binding agreement relating to distribution or liquidation proceeds…Furthermore and for the sake of conservatism, it’s best if S Corporations avoid disproportionate distributions where possible.The standard procedure for the majority of S Corporations should be to make only distributions that are proportional to each shareholder’s ownership interest.

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the difference in timing of the distributions to A and B does not cause S to be treated as having more than one class of stock.

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