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distribution out of the accumulated adjustments account exceeds
the adjusted basis of the stock, the excess shall be treated as
gain from the sale or exchange of property. Sec. 1368(b)(2);
Williams v. Commissioner, 110 T.C. 27, 29-31 (1998).
Section 1368(c)(2) provides that if a distribution by an S
corporation with accumulated earnings and profits exceeds the
amount of its accumulated adjustments account, the portion of the
distribution that exceeds such account will be treated as a
dividend to the extent it does not exceed the accumulated
earnings and profits of the S corporation.
Section 1368(e)(3)(A) provides for an election to reverse
the order of distribution to allow a distribution of earnings and
profits first and accumulated S corporation earnings next.
Section 1368(e)(3)(A) provides:
(A) In general--An S corporation may, with the
consent of all of its affected shareholders, elect to
have paragraph (1) of subsection (c) not apply to all
distributions made during the taxable year for which
the election is made.[4]
3(...continued)
accumulated earnings and profits--
(1) Amount applied against basis.--The
distribution shall not be included in gross
income to the extent that it does not exceed
the adjusted basis of the stock.
4Sec. 1368(e)(3)(B) states "the term 'affected shareholder'
means any shareholder to whom a distribution is made by the S
corporation during the taxable year."
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Last modified: May 25, 2011