If a corporation distributes an asset acquired within five years through a capital contribution to a more-than-50% shareholder in a non-pro rata distribution, is any realized loss... If a corporation distributes an asset acquired within five years through a capital contribution to a more-than-50% shareholder in a non-pro rata distribution, is any realized loss permanently disallowed?
Understand the Problem
The question is asking about the tax implications of a corporation distributing an asset to a majority shareholder in a non-pro rata distribution. Specifically, it focuses on whether a realized loss on such a distribution is permanently disallowed if the asset was acquired within five years through a capital contribution.
Answer
Yes, the realized loss is generally disallowed when distributing to a >50% shareholder in a non-pro rata distribution.
Generally, if a corporation distributes an asset acquired within five years through a capital contribution to a more-than-50% shareholder in a non-pro rata distribution, any realized loss is disallowed. This is per the information from CSUDH and reflects a scenario where losses are not recognized when distributing property to a majority shareholder.
Answer for screen readers
Generally, if a corporation distributes an asset acquired within five years through a capital contribution to a more-than-50% shareholder in a non-pro rata distribution, any realized loss is disallowed. This is per the information from CSUDH and reflects a scenario where losses are not recognized when distributing property to a majority shareholder.
More Information
The disallowance of losses in such distributions is meant to prevent corporations from using distributions to related parties to artificially create tax losses.
Tips
It is a common mistake to assume that all realized losses are recognized for tax purposes. Distributions to related parties, such as majority shareholders, are subject to special rules that may disallow loss recognition.
Sources
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