- 17 -
by an S corporation depends upon whether the corporation has
accumulated earnings and profits. Compare subsec. (b) with
subsec. (c) of sec. 1368. If the S corporation has no
accumulated earnings and profits, the distribution is nontaxable
to the extent of the shareholder’s adjusted basis in the stock.
See sec. 1368(b)(1). Distributions in excess of adjusted basis
are treated as gains from the sale or exchange of property. See
sec. 1368(b)(2). If the S corporation has accumulated earnings
and profits, then distributions, in some circumstances, are
treated as dividends and thus as ordinary income. See sec.
1368(c)(1) and (2).
Petitioners argue that Bonnevista and Castle Towers had no
accumulated earnings and profits in 1993, because the
corporations were not then in existence. Petitioners argue
alternatively that earnings and profits did not exceed the
retained earnings reported by Bonnevista and Castle Towers on
Schedules L, Balance Sheets, of the last Federal income tax
returns that they filed (i.e., Bonnevista’s 1991 Form 1120S and
Castle Tower’s 1990 Form 1120S).13
Petitioners’ arguments are without merit. In the first
instance, as previously discussed, petitioners failed to
13 On Schedule L of its 1991 Form 1120S, Bonnevista reported
negative yearend retained earnings of $626,228. On Schedule L of
its 1990 Form 1120S, Castle Towers reported yearend retained
earnings of $218,623.
Page: Previous 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 NextLast modified: May 25, 2011