When an S corporation distributes noncash property to a shareholder, the tax consequences differ based on whether the S corporation is distributing appreciated property (fair market value of the property exceeds the basis of the property) or loss property (fair market value of the property is less than the basis of the property). If the S corporation is distributing appreciated property to a shareholder, this will be treated as if the S corporation sold the property to the shareholder and a gain will be recognized. The gain (the character of which depends on the type of asset) will then be passed through to shareholders, who will each be taxed on their pro rata share of the gain. If the S corporation is distributing loss property to a shareholder, the loss will not be recognized. Thus, it is not good tax planning for an S corporation to distribute loss property to …
