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Most dividends (as opposed to distributions) paid by an S corporation will be treated as “qualifying dividends” subject to the current maximum federal income tax rate of 15%.

His basis in those shares is ,000,000, or ,000 a share.If the S corporation has no undistributed E&P from prior C corporation years, then the distribution will be treated first as a tax-free return of the selling shareholder’s tax basis and then as capital gain.Attribution Rules For purposes of determining whether a selling shareholder meets one of the tests set forth in IRC Section 302, a selling shareholder will be deemed to “constructively” own company shares under the attribution rules of IRC Section 318.Under IRC Section 302, for a redemption to be treated as a “sale or exchange,” the transaction must meet at least one of the following three tests: (1) the transaction must result in a complete redemption of all of the S corporation stock owned by the selling shareholder (the “complete redemption test”); (2) immediately after the redemption, the selling shareholder must own less than 50% of the total voting power of the company and the percentage of the company’s voting stock owned by the selling shareholder immediately after the redemption must be less than 80% of the company’s total voting stock owned by the shareholder immediately prior to the redemption (the “substantially disproportionate test”); or (3) the redemption is not essentially equivalent to a dividend (the “not essentially equivalent to a dividend test”).For purposes of these three tests, ownership will include the shareholder’s direct, indirect and constructive ownership of the company’s stock.

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