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.
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:
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.