You have a couple of things going on here:
- When an S corporation distributes property (noncash) in complete liquidation of the corporation, the corporation recognizes gain or loss as if the property were sold to the distributee at its fair market value. The gain or loss flows through to the shareholders under the normal S corporation pass-through rules.
- Shareholder's then update their basis schedule for the impact of the final K-1 applicable line items.
- Once the basis schedule is updated, the shareholder can determine their gain or loss; if after you adjust the basis for the liquidating distribution you still have basis remaining, you have a capital loss. If the liquidating distribution exceeds your basis, causes basis to go below zero, you have a gain to the extent of this "negative" amount.
- Liquidating distributions of S corporations are reported on form 1099-DIV boxes 8 and 9 (cash or noncash)
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
