What is a nonliquidating distribution
An attempt to allocate more of the gain to the land to avoid §1239 ordinary income would come at a cost. Pursuant to §331(a), amounts received by a noncorporate Shareholder in a distribution in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock.Less gain would be allocated to the warehouse which can depreciate the cost of the warehouse over 39 years because the warehouse, pursuant to §1250, is depreciable nonresidential real property. Pursuant to §453B(a)(1), if a note is sold or exchanged, gain or loss shall result to the extent of the difference between the basis of the note and the amount realized.If Corporation were to distribute the warehouse in a liquidating distribution, any gain recognized would be ordinary gain pursuant to §1239.§1239 applies when depreciable property is sold or exchanged, directly or indirectly, between related persons and treats any gain recognized in that sale or exchange as ordinary income.
The precise tax consequences to the Corporation and its sole shareholder (“Shareholder”) are not possible to know without knowing the fair market values and bases of the Corporation’s assets.
Any gain or loss shall be considered as resulting from the sale or exchange of the property in which the note was received.
Pursuant to §453B(b), the basis of the note shall be the excess of the face value of the note over an amount equal to the income which would be returnable were the obligation satisfied in full.
However, if the stock basis is depleted before Corporation distributes all of its assets, then any subsequent distributions will result in taxable gain to the extent that there is gain recognized in those subsequent distributions.
In either a liquidating or a nonliquidating distribution, a distribution of cash to Shareholder will only decrease Shareholder’s stock basis by the amount of cash distributed.