-33-
(c) of section 1368 for distributions of property to the
shareholder shall be applied by taking into account the
adjustments to the basis of the shareholder's stock described in
section 1367. Thus, the adjustments to the shareholder's basis
in his stock for the losses and deductions of the S corporation
must be made before the adjustments required for distributions.
If a shareholder's basis in his stock is reduced to zero by
the shareholder's pro rata share of the S corporation's losses
and deductions, section 1367(b)(2) requires that the amount of
the losses and deductions that exceed the shareholder's basis in
his stock be applied to reduce (but not below zero) the
shareholder's basis in any indebtedness of the S corporation to
the shareholder. Sec. 1367(b)(2)(A).
The aggregate amount of the losses and deductions taken into
account in determining the tax of a shareholder for any taxable
year, however, shall not exceed the sum of the adjusted basis of
the shareholder's stock in the S corporation and the adjusted
basis of any indebtedness of the S corporation to the
shareholder. Sec. 1366(d)(1).
Thus, petitioner's basis in his Development stock would be
reduced first for the losses and deductions (but not below zero),
and if the losses and deductions exceeded his stock basis, the
excess would then reduce petitioner's basis in Development's
indebtedness to him (but not below zero). The adjustments to
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