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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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