There are two types of distributions that a partner may receive from a partnership: a current distribution and a liquidating distribution. This results in what I would expect to see in the end. The term “liquidation of a partner’s interest” is defined as the termination of a partner’s entire interest in a partnership by means of a distribution, or a series of distributions. s�!��߅FU�k�fB ���'X9d�*Y&\,� Many times partners choose to dissolve and liquidate their partnerships to start new ventures. This “market” is accomplished by causing the entity to periodically offer to buy back a predetermined portion of its equity, usually subject to a value cap set by the entity’s managers that takes into account the reasonable needs and prospects of the business.Alternatively – and this is the way that most closely held businesses handle the issue – the entity will not have adopted a formal buy-back program; instead, its managers, acting on an A cash distribution in partial redemption or liquidation of an owner’s equity in the business provides liquidity for the owner who wants to remove value from the business, may protect the liquidity needs of the business, and may avoid the tension that otherwise could arise among the owners in the absence of a buy-back program.However, the distribution of cash comes with a business and economic cost to the distributee-owner: their equity interest will have been reduced, they will likely be entitled to a smaller share of business profits, distributions, appreciation and sales proceeds, and they may have a smaller vote in decision-making.Of course, there is also a tax cost to be considered, which may reduce the amount of cash available to the distributee-owner.The income tax consequences arising from each of the foregoing cash distributions will depend upon a number of factors, including the form of business entity from which the distribution is made, and the extent to which the owner’s equity in the business is reduced.Before considering the income tax treatment of a cash distribution from a closely held business to its owners, it would be worthwhile reviewing how the entity’s income is taxed without regard to any subsequent distribution of such income.The taxable income of a C corporation will be subject to federal tax at the corporate level at a flat rate of 21 percent.An S corporation is generally not subject to a corporate-level income tax.In order to allow the subsequent “tax-free” distribution from the S corporation to a shareholder of an amount of cash equal to the amount of corporate income that was already included in the gross income of the shareholder, the shareholder’s adjusted basis for their S corporation shares is increased by the amount of income so included.As in the case of an S corporation, a partnership – including an LLC that is treated as a partnership for tax purposes – is not subject to federal income tax; its taxable income is reported by its partners on their tax returns, and they are taxed thereon without regard to whether any distribution has been made by the partnership.Also as in the case of the S corporation shareholder, a partner’s adjusted basis for their partnership interest is increased by the amount of partnership income that was included in the partner’s gross income, so as to allow the distribution of such an amount of cash to the partner without triggering additional recognition of income.Having reviewed how the owners of a closely held business may withdraw cash from their business entity after it has been taxed to the entity, or to the owners themselves, we now turn to the income tax consequences of a current distribution to the owners.A cash distribution by a C Corporation to a shareholder with respect to its stock is included in the shareholder’s gross income as a dividend to the extent the distribution is made out of the corporation’s accumulated, and current, earnings and profits.If the distribution satisfies the requirements for a “qualified dividend,” it will be subject to federal income tax in the hands of the shareholder at a rate of 20 percent;That portion of the distribution that exceeds the corporation’s earnings and profits will be applied against, and reduce, the shareholder’s adjusted basis for their stock in the corporation; basically, a tax-free return of capital.To the extent the distribution exceeds the shareholder’s adjusted basis for their stock, the excess portion will be treated as gain from the sale of the stock; in other words, a deemed sale that will likely be treated as capital gain,Assuming the corporation has only one outstanding class of stock, the declaration and payment of a dividend by the corporation’s board of directors must necessarily be made to every one of its shareholders; a shareholder cannot turn their back on the distribution and its tax consequences.That being said, a shareholder may, if permitted by the board or by the terms of a shareholder’s agreement, choose to “leave” their share of the cash distribution in the corporation, either as an additional capital contribution or as a loan.The tax consequences arising from a distribution of cash by an S corporation to its shareholders will depend, in part, upon whether the corporation has any earnings and profits from taxable years when it was a C corporation, or from a target corporation that it may have acquired in a transaction that caused it to succeed to the target’s tax attributes.In that case, a distribution of cash by an S corporation with respect to its single class of stock, which would otherwise be treated as a dividend if made by a C corporation with earnings and profits, will first be applied against the distributee-shareholder’s adjusted basis for the stock – a tax-free return of capital – and if the amount of the distribution exceeds the shareholder’s stock basis, the excess will be treated as gain from the sale of property by the shareholder.This gain will likely be taxed as long-term capital gain,Any gain so recognized will be considered as gain from the sale of the partnership interest of the distributee partner.In addition, the gain may also be subject to the 3.8 percent surtax on net investment income, if the partnership’s trade or business is a passive activity with respect to the partner.However, if any of the cash deemed to have been received by the partner – in the deemed sale of their partnership interest – is attributable to any unrealized receivablesIf the current distribution described above did not occur, or if the amount thereof was insufficient for the needs of a particular owner, and assuming the business entity has agreed to redeem a portion of this owner’s equity in the business in order to get them additional cash, what are the tax consequences to the owner?The tax consequences to a shareholder, some of whose shares of stock in the C corporation are acquired by the corporation from the shareholder in exchange for cash – a redemptionThus, if every shareholder sold 10 percent of their shares to the issuing corporation (a pro rata redemption), none of the shareholders will have experienced a reduction in their relative ownership.