- 15 - After reviewing the statutory notices of deficiency and subsequent computations referred to supra, we find that respondent has not adjusted Michael's, Jody's, and David's adjusted bases in their stock in accordance with the applicable law. For the taxable years in issue, a shareholder's adjusted basis in the stock of an S corporation is: (1) Increased by the shareholder's pro rata share of the corporation's income; (2) decreased by the shareholder's pro rata share of the corporation's losses and deductions; and (3) decreased by the amount of the shareholder's section 1368 distributions. Sec. 1367; sec. 1.1367-1(e), Income Tax Regs. Respondent erroneously flip-flopped steps (2) and (3) by decreasing the adjusted bases by the amounts of the shareholders' distributions before decreasing the adjusted bases by the amounts of the shareholders' pro rata shares of losses and deductions.4 We hold that the amounts of Michael's, Jody's, and David's recognized losses and gains with respect to their stock in the corporation must be computed in a manner consistent with the law in effect during the taxable years in issue, as explained supra. 4 For taxable years beginning after Dec. 31, 1996, the Small Business Job Protection Act of 1996, Pub. L. 104-188, sec. 1309(a)(1), 110 Stat. 1755, 1783, amended the parenthetical language in sec. 1366(d)(1)(A) to read "(determined with regard to paragraphs (1) and (2)(A) of section 1367(a) for the taxable year)". The effect of this amendment was to change the order of the basis adjustments to that used by respondent in the statutory notices of deficiency. See H. Rept. 104-586, at 89 (1996), 1996- 3 C.B. 331, 427. This amendment, however, is not applicable to the taxable years in issue.Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Next
Last modified: May 25, 2011