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:
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