Mel T. Nelson - Page 6

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               Section 1366(a) provides, generally, that income, losses,              
          deductions, and credits are passed through pro rata to                      
          shareholders on their individual income tax returns.  Secs.                 
          1363(a), 1366(a).  Section 1366(b) provides that the character of           
          each item of income is determined as if it were realized directly           
          from the source from which the corporation realized it, or                  
          incurred in the same manner as the corporation.  A shareholder's            
          gross income includes a pro rata share of the subchapter S                  
          corporation's gross income.  Sec. 1366(c).  The shareholder’s               
          basis, once computed, limits the amount of losses and deductions            
          that may be taken into account by a shareholder for the taxable             
          year.  Sec. 1366(d).  Any losses and deduction that the                     
          shareholder is not entitled to deduct currently are carried                 
          forward indefinitely (suspended losses).  Id.                               
               Section 1367(a)(1) limits the items by which the shareholder           
          may increase his basis in the stock of an S corporation to the              
          following items, inter alia:                                                
               (A) the items of income described in subparagraph (A)                  
               of section 1366(a)(1), [and]                                           
               (B) any nonseparately computed income determined under                 
               subparagraph (B) of section 1366(a)(1) * * *                           

          Section 1367(b)(1) provides that an item "required to be included           
          in the gross income of a shareholder and shown on his return" is            
          taken into account under section 1367(a)(1)(A) only to the extent           
          included in gross income on the shareholder's return, increased             




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Last modified: May 25, 2011