There are subtle (and some not so subtle) differences between the two entities from a tax perspective as well.

One significant difference exists with respect to distributions of appreciated property. This article previously appeared in the Tax Assessment newsletter, published by the North Carolina Bar Association, and is reprinted with permission.

Any amount of the distribution remaining after exhaustion of the earnings and profits is applied (as in the case of a corporation having no earnings and profits), first against the shareholder`s remaining basis, and then as gain from the sale or exchange of the stock. Under Section 1366(f), if corporate-level taxes are imposed by Section 1374 or 1375, the ,000 gain (and accompanying basis ad­justment) is reduced by any such taxes.

S corpora­tions typically are more expensive to organize and require greater attention to the maintenance of corporate formalities than is required with partnerships.

However, the corporate form usually provides owners with a greater degree of insulation from business liabilities than does the partnership form.

In addition to taking advantage of the lower rates for indi­viduals, the pass-through entity eliminates double taxation associated with the payment of dividends from C corporations.

Although both S corporations and partnerships are now tax-favored entities, there are differences between the two.

Basis adjustments to shareholders` stock are determined under Section 1367(a). If X distributes undivided interests in appreciated property worth $50,000 (with a basis of $10,000) pro rata to its four 25 percent shareholders. The four shareholders each receive a basis in the distributed property of $12,500.

The gain recognized by the S corporation passes through to the shareholders and increases the bases of their corporate stock. Assuming no other gain or loss recognition by X for the year, its accumulated adjustments account is increased from ,000 to ,000 and decreased by the ,000 dis­tribution to net out at

The gain recognized by the S corporation passes through to the shareholders and increases the bases of their corporate stock. Assuming no other gain or loss recognition by X for the year, its accumulated adjustments account is increased from ,000 to ,000 and decreased by the ,000 dis­tribution to net out at [[

The gain recognized by the S corporation passes through to the shareholders and increases the bases of their corporate stock. Assuming no other gain or loss recognition by X for the year, its accumulated adjustments account is increased from $10,000 to $50,000 and decreased by the $50,000 dis­tribution to net out at $0 at year-end.Further, if appreciated depreciable property is distributed to a share­holder owning 50 percent or more of the S corporation`s stock, Section 1239 requires that the portion of the corporate gain attribut­able to the distribution received by such shareholder be reclassified as ordinary income.As with partnerships, an S corporation`s taxable gains usually pass through to its owners and avoid double taxation.Section 311(b)(2) mandates that the fair market value of the property for determination of gain recognition by the corporation is not less than the amount of any corporate liability assumed by the distributee in connection with the distribution.Gain Characterization and Basis Implications The character of the S corporation`s gain passes through to its shareholders under Section 1366(b).This article demon­strates how to ensure that such distributions do not cause unexpected tax results.

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The gain recognized by the S corporation passes through to the shareholders and increases the bases of their corporate stock. Assuming no other gain or loss recognition by X for the year, its accumulated adjustments account is increased from $10,000 to $50,000 and decreased by the $50,000 dis­tribution to net out at $0 at year-end.

Further, if appreciated depreciable property is distributed to a share­holder owning 50 percent or more of the S corporation`s stock, Section 1239 requires that the portion of the corporate gain attribut­able to the distribution received by such shareholder be reclassified as ordinary income.

As with partnerships, an S corporation`s taxable gains usually pass through to its owners and avoid double taxation.

Section 311(b)(2) mandates that the fair market value of the property for determination of gain recognition by the corporation is not less than the amount of any corporate liability assumed by the distributee in connection with the distribution.

Gain Characterization and Basis Implications The character of the S corporation`s gain passes through to its shareholders under Section 1366(b).

This article demon­strates how to ensure that such distributions do not cause unexpected tax results.

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The gain recognized by the S corporation passes through to the shareholders and increases the bases of their corporate stock. Assuming no other gain or loss recognition by X for the year, its accumulated adjustments account is increased from $10,000 to $50,000 and decreased by the $50,000 dis­tribution to net out at $0 at year-end.

Further, if appreciated depreciable property is distributed to a share­holder owning 50 percent or more of the S corporation`s stock, Section 1239 requires that the portion of the corporate gain attribut­able to the distribution received by such shareholder be reclassified as ordinary income.

As with partnerships, an S corporation`s taxable gains usually pass through to its owners and avoid double taxation.

Section 311(b)(2) mandates that the fair market value of the property for determination of gain recognition by the corporation is not less than the amount of any corporate liability assumed by the distributee in connection with the distribution.

]] at year-end.

Further, if appreciated depreciable property is distributed to a share­holder owning 50 percent or more of the S corporation`s stock, Section 1239 requires that the portion of the corporate gain attribut­able to the distribution received by such shareholder be reclassified as ordinary income.

As with partnerships, an S corporation`s taxable gains usually pass through to its owners and avoid double taxation.

Section 311(b)(2) mandates that the fair market value of the property for determination of gain recognition by the corporation is not less than the amount of any corporate liability assumed by the distributee in connection with the distribution.

Gain Characterization and Basis Implications The character of the S corporation`s gain passes through to its shareholders under Section 1366(b).

This article demon­strates how to ensure that such distributions do not cause unexpected tax results.

at year-end.

Further, if appreciated depreciable property is distributed to a share­holder owning 50 percent or more of the S corporation`s stock, Section 1239 requires that the portion of the corporate gain attribut­able to the distribution received by such shareholder be reclassified as ordinary income.

As with partnerships, an S corporation`s taxable gains usually pass through to its owners and avoid double taxation.

Section 311(b)(2) mandates that the fair market value of the property for determination of gain recognition by the corporation is not less than the amount of any corporate liability assumed by the distributee in connection with the distribution.

Gain Characterization and Basis Implications The character of the S corporation`s gain passes through to its shareholders under Section 1366(b).

This article demon­strates how to ensure that such distributions do not cause unexpected tax results.