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adjustments to the basis of shareholder stock for items of
income, loss, and deductions of an S corporation for the taxable
year and for distributions to shareholders of the S corporation
during the year. Petitioners maintain that the literal terms of
section 1367(a) require that the adjustments to stock basis be
made in the order listed in the statute. Pursuant to the list
contained in section 1367(a), petitioners contend that basis is
decreased for distributions under subparagraph (A) of section
1367(a)(2) before it is decreased for current year losses under
subparagraphs (B) and (C) of section 1367(a)(2).7 Petitioners
7 Sec. 1367(a) provides for the following adjustments to
the basis of shares in an S corporation:
(a) General Rule.--
(1) Increases in basis.--The basis of each
shareholder’s stock in an S corporation shall be
increased for any period by the sum of the following
items determined with respect to that shareholder for
such period:
(A) the items of income described in
subparagraph (A) of section 1366(a)(1),
(B) any nonseparately computed income
determined under subparagraph (B) of section
1366(a)(1), and
(C) the excess of the deductions for
depletion over the basis of the property subject
to depletion.
(2) Decreases in basis.--The basis of each
shareholder’s stock in an S corporation shall be
decreased for any period (but not below zero) by the
sum of the following items determined with respect to
the shareholder for such period:
(A) distributions by the corporation which
were not includible in the income of the
shareholder by reason of section 1368,
(B) the items of loss and deduction described
in subparagraph (A) of section 1366(a)(1),
(C) any nonseparately computed loss
determined under subparagraph (B) of section
(continued...)
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