A distribution reported on a federal IRS Form 1120S Schedule K-1 is a taxable dividend to the shareholder under Tennessee income tax law. Tennessee income tax is not controlled by federal tax law. Tennessee law taxes dividends from stock and Tennessee courts have defined a dividend as “return upon stock.” An S Corporation distribution is a dividend from stock and therefor is taxable.
The S-Corporation is not required to file a Hall Income Tax Return because the distribution is taxable to the shareholder. The shareholder is responsible to report the distribution under their individual account.