[AMERICANDREAM]

(1) Formation: S-Corp formation follows the C-Corp rules (80% control, etc).
(2) Taxation: follows the p-ship rules (pass-through).
(3) Non-liquidating Distribution: generally no tax (because of AAA), but taxability comes into play with E&P (from when it was a C) and distribution in excess of capital basis (capital gain).
(4) Liquidating distribution: Follow the same rule as (3).

So in other words, S-Corp follows the p-ship rule only for taxation?

Taking the exam soon so it’d be great if I could get some help! Thank you!

[isoceles]

1) Correct
2) Correct
3) Correct. Nontaxable to the extent of AAA. From AAA to AEP it's treated as an ordinary dividend. Further excess is nontaxable to the extent of remaining stock basis. Anything after that is gain.
4) This is incorrect. Distributions received from the S-Corp to the shareholder are treated as received in exchange for stock which will generally result in a capital gain or loss. Noncash property has an FMV basis to the distributee. Basically the same as C-Corp. Also you can have built-in gains tax on appreciated assets if it was formally a C-Corp but I haven't seen this in a problem.

[AMERICANDREAM]

Thanks!

[SeattleCPA]

These comments from someone who practices S corp tax…

I would never talk about S corporation formation or use that phrase. Gosh, not to say that some exam doesn't use that gibberish… but you have entity formation (either regular corporation or another eligible entity like an LLC)… and then you have the election to do your accounting using the rules of Subchapter S.

Further, while Sec 351 and related IRC sections have requirements for no tax at incorporation (and those apply potentially to an S election if there's a deemed incorporation that occurs because of the S election) I would think that if you start talking about requirements for formation you're quickly into the area of rules for determining whether an entity is eligible to make the s election… stuff like are owners eligible shareholders and is there a single class of stock.

A final point: The Subchapter S accounting rules are basically a simplified version of partnership accounting… but I guess I'd be a little cautious about thinking that they're very equivalent… Maybe thinking about Subchapter S as being sort of like a watered-down subset of partnership accounting rules is closer to the mark.

[Ben]

Tax person here (EA, don't hate)…

I concur with all the above answers.

[Author]

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