During the post-termination transition period, property distributions are tax-free to shareholders to the extent they do not exceed the S corporation's AAA balance and the individual shareholder's basis in the stock.
The distribution must be made in cash to be tax-free.

Question

Quizplus · Accepted Answer

The statement is false. Property distributions can also be tax-free if they consist of the corporation's assets with a fair market value equal to or less than their adjusted basis, and the shareholder assumes the corporation's liabilities related to the distributed assets. In this case, the shareholder's basis in the S corporation stock is reduced by the amount of the assumed liabilities.

During the Post-Termination Transition Period, Property Distributions Are Tax-Free to Shareholders