Final answer:
C corporations, S corporations, and partnerships have different tax consequences for nonliquidating and liquidating distributions of noncash property. The tax rules do not favor one entity type over the others.
Step-by-step explanation:
When it comes to tax consequences for distributions of noncash property, C corporations, S corporations, and partnerships are treated differently.
For C corporations, both nonliquidating and liquidating distributions of noncash property are generally taxable events. The corporation recognizes gain or loss equal to the property's fair market value minus its basis. The shareholders also recognize dividend income equal to the fair market value of the property received.
For S corporations, nonliquidating distributions of noncash property generally do not trigger immediate tax consequences. The corporation's gain or loss is passed through to the shareholders, who then adjust their basis in the corporation accordingly. However, liquidating distributions of noncash property are generally treated as if the property were sold, and the same tax consequences as mentioned for C corporations apply.
For partnerships, both nonliquidating and liquidating distributions of noncash property generally do not trigger immediate tax consequences. The partnership's gain or loss is passed through to the partners, who adjust their basis in the partnership accordingly. However, if the distribution is deemed a disguised sale, then the tax consequences are similar to those for C corporations.
In terms of favorability, the tax rules do not specifically favor one entity type over the others. It depends on the specific circumstances and goals of the business owners. C corporations may provide more flexibility in terms of distributions and deductions, but they are subject to double taxation. S corporations and partnerships offer pass-through taxation, but have limitations on the number and type of shareholders or partners.