By liquidating

100–647, § 1006(e)(3), substituted “an election may be made” for “such corporation may elect” in concluding provisions. Except as otherwise provided in this section, the amendments made by this subtitle [subtitle D (§§ 631–634) of title VI of Pub. 99–514, enacting this section and section 337 of this title, amending sections 26, 311, 312, 332, 334, 338, 341, 346, 367, 453, 453B, 467, 852, 897, 1056, 1248, 1255, 1276, 1363, 1366, 1374, and 1375 of this title, and repealing former sections 333, 336, and 337 of this title] shall apply to—, and to which the amendments made by section 632 (other than subsection (b) thereof) do not apply, paragraph (1) of section 1374(b) of the Internal Revenue Code of 1954 (as in effect on the date before the date of the enactment of this Act [, a ruling request was submitted to the Secretary of the Treasury or his delegate with respect to a transaction of a kind described in section 336 or 337 of the Internal Revenue Code of 1954 (as in effect before the amendments made by this subtitle).

The character of gain or loss recognized by the S shareholder depends on whether the stock is a capital asset in the shareholder’s hands and whether the transaction constitutes a complete or a partial liquidation of the corporation.

Long-term or short-term classification of a liquidation that qualifies for capital gain treatment depends on the shareholder’s holding period, with long-term status having significant importance due to the 15% tax rate cap on long-term capital gains.

Shareholders in the 35% tax bracket achieve a 57.1% ((35% – 15%) ÷ 35%) tax savings on capital gain versus ordinary income.

For tax years beginning in 2008, 2009, and 2010, the savings is even greater for taxpayers in the 10% and 15% brackets because their net capital gain is taxed at 0% in those tax years.

More limitations on accuracy are described at the GPO site.

he shareholder consequences of a complete liquidation of an S corporation are governed by Secs. The dividend rules that otherwise apply to corporate distributions are not applicable to distributions in complete liquidation.

Distributions in complete liquidation of an S corporation are treated as payments in exchange for the shareholder’s surrendered stock (Sec. In addition, during the liquidation of an S corporation, it may be difficult to predict the ending balance of AAA.

This may in turn make it difficult to accurately determine the AAA available for ordinary distributions and makes inadvertent dividend distributions from AE&P more likely to occur.

If the S corporation has AE&P, the shareholders may want to forgo distributions prior to commencement of the liquidating distributions, because once the AAA is exhausted, preliquidation distributions are treated as dividend income to the extent of AE&P.

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