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Towers Construction’s earnings to Briggs and Mrs. Morris.8
Thus, we must consider the tax treatment of these distributions.
If an S corporation has no accumulated earnings and profits,
then a distribution is generally excluded from the shareholder’s
gross income to the extent of his or her adjusted basis in the S
corporation stock, and distributions in excess of the adjusted
basis are treated as gains from the sale or exchange of property.
See sec. 1368(b). Although the record is inconclusive on this
point, it appears most likely that Towers Construction had no
accumulated earnings and profits for the years in issue.9 The
record is devoid of evidence, however, of Briggs’ and Mrs.
Morris’ adjusted bases in their Towers Construction stock.
Generally, a shareholder’s adjusted basis in S corporation stock
8 For this purpose, we treat distributions to Mr. Morris,
who was in effect a beneficial owner or coowner of the stock
nominally held by Mrs. Morris, as being with respect to that
stock.
9 An S corporation may have accumulated earnings and profits
from a variety of sources, including: (1) As a carryover from
years in which it was a C corporation before it became an S
corporation, see Cameron v. Commissioner, 105 T.C. 380, 384
(1995), affd. sub nom. Broadway v. Commissioner, 111 F.3d 593
(8th Cir. 1997); (2) as S corporation earnings for taxable years
prior to 1983, see H. Conf. Rept. 104-737, at 227 (1996), 1996-3
C.B. 741, 967; and (3) as the result of certain reorganizations
and the like involving the application of subch. C to an S
corporation, as described in sec. 1371(c)(2), see Toberman v.
Commissioner, T.C. Memo. 2000-221. Towers Construction elected S
corporation status in June 1983. It appears that Towers
Construction was never a C corporation. From the sketchy
information contained in the record, it seems most likely that
Towers Construction was never involved in reorganizations and the
like within the meaning of sec. 1371(c)(2).
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