Steven R. and Terry D. Williams - Page 10

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          holding here that adjustments to the AAA for losses are made                
          prior to adjustments for any distributions made during the year.            
          In particular, the legislative history states:                              
               Under the bill, both taxable and nontaxable income                     
               and deductible and nondeductible expenses will serve,                  
               respectively, to increase and decrease a subchapter S                  
               shareholder's basis in the stock of the corporation.                   
               These rules generally will be analogous to those                       
               provided for partnerships under section 705.  Under                    
               these rules, income and loss for any corporate taxable                 
               year will apply to adjust basis before the distribution                
               rules apply for that year.   * * *  [Emphasis added.]                  
          H. Rept. 97-826, at 17 (1982); 1982-2 C.B. 730, 738; S. Rept. 97-           
          640, at 18 (1982); 1982-2 C.B. 718, 726.  Petitioners contend               
          that the section 1367 legislative history does not provide clear            
          guidance on the order of adjustments to the AAA.  Petitioners               
          rely on the statement in the legislative history that basis                 
          adjustments to S corporation stock should be analogous to the               
          basis adjustments to partnership interests.  Under section 705 of           
          the partnership rules, a distribution to a partner decreases the            
          partner's basis in his partnership interest before the partner's            
          basis is reduced for partnership losses.  See Rev. Rul. 66-94,              
          1966-1 C.B. 166.  Under the partnership rules, the relevant basis           
          is the partner's basis in the partnership interest when the                 
          distribution occurs.  However, petitioners' argument would                  
          require us to ignore the explicit statement in the legislative              
          history that adjustments for losses of an S corporation are made            
          before adjustments for shareholder distributions.  The                      
          legislative history states that subchapter S is meant only to be            
          generally analogous to subchapter K, and directly conflicts with            




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