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contend that section 1368(d) refers to the section 1367 stock
basis adjustments for the proper order of adjustments to the AAA.
Respondent maintains that section 1368, and not section
1367, controls the order of adjustments to the AAA. Section
1368(d), relied on by petitioners, provides that the tax
treatment of shareholder distributions under section 1368(b) and
(c) shall be determined by taking into account the adjustments to
the basis of the shareholder's stock under section 1367 and the
adjustments to the AAA under section 1368(e)(1). Section 1368(e)
controls the adjustments to the AAA of an S corporation for
current year operating results and shareholder distributions and
provides that the AAA is to be adjusted in a manner similar to
the adjustments to the basis of S corporation stock provided in
section 1367. Sec. 1368(e)(1)(A).
Petitioners' reliance on section 1367 for the timing or
order of adjustments to the AAA is misplaced. The section 1367
legislative history states that the current year's losses
decrease the basis of S corporation stock before the stock basis
is decreased for shareholder distributions and supports our
(...continued)
1366(a)(1),
(D) any expense of the corporation not
deductible in computing its taxable income and not
properly chargeable to capital account, and
(E) the amount of the shareholder’s deduction
for depletion for any oil and gas property held by
the S corporation to the extent such deduction
does not exceed the proportionate share of the
adjusted basis of such property allocated to such
shareholder under section 613A(c)(13)(B).
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