- 5 - such tax-free distributions reduce the shareholder's stock basis. In accord with these concepts, the above-mentioned act also obviated the conceptual need for corporate earnings and profits, except to the extent that an S corporation may possess accumulated earnings from prior years in which it was a subchapter C corporation. See sec. 1371(c). Where earnings and profits accumulated by a predecessor C corporation exist, they are taken into account in the tax treatment of distributions to S corporation shareholders. This is accomplished through a clearing concept designated as the AAA. The AAA is described and defined in section 1368(e)(1), as follows: (e) Definitions and Special Rules.--For purposes of this section-- (1) Accumulated adjustments account.-- (A) In general.--Except as provided in subparagraph (B), the term "accumulated adjustments account" means an account of the S corporation which is adjusted for the S period in a manner similar to the adjustments under section 1367 (except that no adjustment shall be made for income (and related expenses) which is exempt from tax under this title and the phrase "(but not below zero)" shall be disregarded in section 1367(b)(2)(A)) and no adjustment shall be made for Federal taxes attributable to any taxable year in which the corporation was a C corporation. * * * An S corporation distribution from accumulated earnings and profits of a predecessor C corporation is treated as a dividend to the extent that the distribution exceeds the S corporation's AAA. Sec. 1368(c)(1) and (2). The AAA is intended to measure the accumulated taxable income of an S corporation that has notPage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 Next
Last modified: May 25, 2011