S corporations with accumulated earnings and profits should take advantage of this distinction by clearly identifying liquidating distributions in the documents authorizing the liquidation.
This allows partners to defer recognition of gain in appreciated property that they receive from the partnership.
Instead, liquidation of an S corporation is governed by the same rules that apply to liquidation of a C corporation.
The shareholder’s basis is decreased (but not below zero) by the shareholder’s share of the S corporation’s items of loss and deduction, nondeductible expenses (except expenses that are not chargeable to the capital account), depletion deduction for oil and gas property, and distributions to the shareholder that are not made from accumulated earnings and profits.
This helps ensure that the shareholder only benefits once from reductions in income earned by the S corporation.
The Treasury Department (through Reg- ulations), the IRS (through rulings), and the courts (through case law) have provided additional guidance.
All these must be taken into account when calculating E & P.