While an analysis of the tax consequences of a withdrawal from the shareholder usually begins with qualifying the transaction for sale or exchange processing, another starting point is whether Company S has accumulated profits and profits (AE&P). If S AE&P is absent (i.e. has always been an S company and has never acquired a C company with E&P by merger), the dividend treatment cannot result from a withdrawal. In accordance with the normal distribution rules of the S-Gesellschaft, the redemption distribution is considered a non-taxable capital refund in the amount of the adjusted share base, followed by a capital gain on the presumed sale of shares (§ 1368 (b); Rev. Rul. 95-14). Where an S company repays its shares in a transaction that is considered a sale or exchange, the shareholder`s realized and recorded profit or loss is governed by section 1001. The shareholder`s adjusted share base is deducted from the amount of cash and FMV of other real estate received by the company. While the general rule is that the share base is determined from the end of the fiscal year of Company S, the basis of the shares transferred during the year is determined just before the transfer (Regs).
Section 1.1367-1(d)(1)). Therefore, the share base is adjusted for current annual items of income, loss of S businesses, etc., before determining the profit or loss of repayment. Except as otherwise provided in this sub-chapter, such a withdrawal shall be considered to be a distribution of property to which Section 301 applies where a corporation returns its shares [within the meaning of Section 317(b)] and where Subsection (a) of this Section is not applicable.