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Rev. Rul. 2019-13: Cash distributions during the post-termination transition period

Cash distributions, post-termination transition period

The IRS today released an advance version of Rev. Rul. 2019-13 concerning cash distributions made during the post-termination transition period (PTTP). In this revenue ruling, a distribution is made in redemption of the stock of a C corporation that was formerly an S corporation.

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Rev. Rul. 2019-13 [PDF 12 KB] concludes that if, during a former S corporation’s PTTP, the corporation distributes cash in redemption of its stock and that distribution is characterized as a distribution subject to section 301 (rather than as a distribution in exchange for stock), the distribution reduces the adjusted basis of the stock to the extent the distribution does not exceed the corporation’s accumulated adjustments account (AAA). 

The revenue ruling deals with A, the sole shareholder of X, a corporation that elected S status after a period as a C corporation.  X has accumulated E&P of $600x from its earlier C period, no current E&P, and AAA of $800x at the time its S election terminates.  In addition, for the period that includes the distribution in redemption, X has current E&P of $400x.  During X’s PTTP, X distributes $1,000x in redemption of half of A’s stock in X.  There are no other distributions during the PTTP. 

Given these facts, this transaction is treated as a distribution under section 301 and not as a payment made in exchange for stock under section 302(a).  Thus, the ruling concludes that the distribution reduces X’s AAA by $800x and the balance of the distribution ($200x) is characterized as a dividend under section 301(c)(1). 

In reaching these conclusions, the IRS explained that:

  • In general, any distribution of cash by a former S corporation with respect to its stock during the post-termination transition period is applied against and reduces the adjusted basis of the stock to the extent the distribution does not exceed the corporation’s AAA.
  • Section 1368(e) defines the AAA as an account of the S corporation, which is adjusted for the S period in a manner similar to the adjustments under section 1367, except that no adjustment is made for income (and related expenses) that is exempt from tax.
  • The phrase “(but not below zero)” is disregarded in section 1367(a)(2); and no adjustment is made for federal taxes attributable to any tax year in which the corporation was a C corporation.
  • The term “S period” is defined in section 1368(e)(2) as the most recent continuous period during which the corporation has been an S corporation.

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