The receipt or accrual of a capital distribution gives rise to a deemed part-disposal by the shareholder for capital gains tax purposes.The shareholder must calculate a capital gain or loss on the part-disposal by apportioning the base cost of the share according to the ratio of the market values of both the capital distribution and the share, and treating the capital distribution as the proceeds on the part-disposal.The company has since accumulated R2 of retained income, giving the share a market value of R12, and is now being liquidated.
The distribution of pre-acquisition profits can also result in a capital distribution (through an exclusion in the "dividend" definition), and could also result in capital gains tax upon return of the invested capital to the holding company.The capital gain on part-disposal is thus (R9,00-R7,50), or R1,50.At the maximum effective capital gains tax rate for individuals, the shareholder is liable for R0,15 of tax.Nevertheless, Subchapter K has not been amended to recognize these changes. Despite these factors, the Check-the-Box regulations, Regs. Reducing Outside Basis for Unsatisfied Assumed Partner Obligations a. In this case, the shareholder receives a tax-exempt dividend, and the market value of the share falls to R10.When the subsequent capital distribution is received, the apportioned amount of base cost attributable to the part disposal is (R9/R10 x R10), or R9. By separating the two transactions, the application of the legislation produces a result that is in line with the commercial realities of the transaction.§§301.7701-2 and -3, recognize partnership as the default tax classification for all domestic entities that are not organized as corporations or joint stock companies, or engaged in certain regulated businesses like banking and insurance. A number of problems have emerged, particularly for LLCs treated as disregarded entities, including a controversial decision by the IRS to treat the disregarded entity as the one responsible for payroll taxes for its employees, and questions about the status of recourse liabilities of a disregarded entity, particularly one that owns a partnership interest. When the withdrawal is a result of death, there may be other collateral income and transfer tax consequences. Contributed Property Distributed to Another Partner-§ 704(c)(1)(B) 2. Distributions, usually liquidating distributions, are important components of major partnership restructurings, including divisions, mergers, incorporations, and changes in legal form. Partnership's Inside Basis Adjustment under § 734(b) 2. Tiered Partnerships (1) Adjusting Through the Tiers (2) Distribution of Lower-Tier Partnership Interest b. Other Property Distributed to Contributing Partner-§ 737 F.