Liquidating corporation liabilities
Like C corporations, S corporations recognize no gain or loss on a distribution of cash to its shareholders.
If the S corporation distributes appreciated property to a shareholder, the corporation must recognize gain as if the property were sold to the shareholder at fair market value.
Instead, liquidation of an S corporation is governed by the same rules that apply to liquidation of a C corporation.By contrast, liquidating distributions are treated as though the shareholder had sold her S corporation stock to the S corporation in exchange for the distribution from the S corporation. Note: Since the ordinary distribution rules do not apply, the S corporation’s accumulated earnings and profits or accumulated adjustments accounts do not determine the character of the distribution.