- 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 Next
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