Whether or not distributions
are made from the S corporation to the shareholder
during the year the profit or loss and the capital gains
are passed from the corporation and reported on the individual tax return
of the shareholder.
The shareholders will be taxed on the profit as ordinary income and the capital gain at those rates
that are reflected on the Schedule K-1
for the tax
When there are earnings or gains that will be reported for the year on the K-1 any distribution of those earnings does not, in itself, create a taxable event. Rather the distribution is just giving to the shareholder what will be (or has been) reported as income
subject to tax.
When the gain from the sale of the block of insurance is capital gain it will be capital gain to the shareholder to report.
When the gain from the operations of the corporation are ordinary earnings the shareholder will report ordinary income.
Only when there are distributions that are more than the earnings or gains of the corporation are those distributions possibly subject to tax if there is more distributed than the basis the shareholder has in the corporation.
The income retains the character and holding period as it passes from the corporation to the shareholder.
Please ask if you need clarification.
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