110 T.C. No. 4
UNITED STATES TAX COURT
STEVEN R. AND TERRY D. WILLIAMS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18298-95. Filed January 21, 1998.
P, a shareholder in an S corporation (S), received
a 3X distribution from S during 1990. S's Accumulated
Adjustment Account (AAA), under sec. 1368, I.R.C., had
a 3X balance as of the beginning of 1990. S had a 2X
loss for 1990. When subch. S status was elected for S,
its predecessor subch. C corporation had in excess of
2X accumulated earnings and profits. To the extent
that the 3X distribution for 1990 exceeds the balance
of the AAA, P would be taxable for such excess as a
dividend to the extent it did not exceed the
accumulated earnings and profits from the predecessor
subch. C corporation. R determined that the 2X loss
should be first subtracted from the 3X balance of the
AAA before considering the 1990 distribution. R's
determination would result in taxable ordinary income
to P. P counters that distributions should be first
subtracted from the AAA prior to any adjustments for
losses or deductions of the subch. S corporation for
the year. Held: Losses and deductions for the year
are to be first subtracted from the AAA prior to
considering shareholder distributions for the year.
Secs. 1367 and 1368 interpreted.
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