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IRS revenue ruling affects redemptions on stock of former S corporations

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Tax Hot Topics newsletterThe IRS ruled in a recent revenue ruling (Rev. Rul. 2019-13) that distribution-equivalent redemptions reduce an S corporation’s accumulated adjustments account if made during the S corporation’s post-termination transition period.

Under Section 1371(e), distributions of cash by a former S corporation during the post-termination transition period (PTTP) reduce the adjusted basis of the stock to the extent they do not exceed the corporation’s accumulated adjustments account (AAA). The PTTP is the period beginning on the day after the termination of S status and ending on the later of (1) one year after the termination date, or (2) the due date for filing the final S corporation return (including extensions). AAA is a corporate level account that, in general, approximates the cumulative taxable income earned by an S corporation but not yet distributed to its shareholders.

In Rev. Rul. 2019-13, the IRS ruled that Section 1371(e) treatment applies not just to ordinary distributions of cash or property, but also to legal stock redemptions that fail Section 302(b) and are treated as dividends subject to Section 301. This is an expected result, but may provide certainty for some former S corporations considering distribution equivalent redemptions.
 
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Bryan Keith
Managing Director
Washington National Tax Office
T +1 202 861 4116
 
Evan Adams
Manager
Washington National Tax Office
T +1 202 521 1591

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