- 20 -
that Bonnevista and Castle Towers had no accumulated earnings and
profits as the result of reorganizations and the like.
Accordingly, section 1368(c) is the applicable provision for
determining the tax treatment of the distributions to petitioner
arising from the discharge of his indebtedness to Bonnevista and
Castle Towers.
Under section 1368(c), distributions are deemed to come
first from the S corporation’s so-called accumulated adjustments
account (AAA), which is intended to measure the corporation’s
accumulated taxable income that has not been distributed to
shareholders. See sec. 1368(e); Williams v. Commissioner, 110
T.C. 27, 30 (1998). The AAA is increased by the S corporation’s
income and is decreased by its losses and nontaxable
distributions to shareholders. See secs. 1367 and 1368. The AAA
is reduced first by current-year losses and deductions before
considering shareholder distributions for the year. See Williams
v. Commissioner, supra at 34. Distributions that do not exceed
the AAA, like distributions from S corporations with no earnings
and profits, are treated as tax free to the extent of the
shareholder’s adjusted stock basis and then as capital gains.
See sec. 1368(c)(1); sec. 1.1368-1(c), Income Tax Regs. Amounts
distributed in excess of the AAA are next treated as dividends,
and thus as ordinary income, to the extent of the S corporation’s
accumulated earnings and profits. See sec. 1368(c)(2).
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