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company ceased business in 1991. Petitioner argues that the
amount of the capital loss is $140,800.
The principal dispute between the parties turns on whether
petitioner’s basis34 in Eureka Field Nursery stock was reduced by
a reported $155,440.09 reduction in Eureka Field Nursery’s
accumulated adjustment account (the undistributed earnings on
which tax has been paid by Eureka Field Nursery’s shareholders)
in 1986.35
Petitioner asserts that the 1986 reduction in the
accumulated adjustment account was not a distribution; rather, it
was an accounting entry to correct a prior error. According to
34Respondent determined petitioner’s adjusted stock basis in
Eureka Field Nursery by using the figures reported on the
company’s Forms 1120S for the years 1983 through 1990, inclusive.
Respondent made two variations from strict adherence to the
income tax returns. The first variation involves the treatment
of the reported $155,440.09 reduction in Eureka Field Nursery’s
accumulated adjustment account in 1986 (discussed above). The
second variation involves a $43 adjustment to petitioner’s stock
basis in 1990, which petitioner has not disputed. Thus, we
consider the $43 adjustment conceded by petitioner.
35Respondent determined that petitioner’s adjusted basis of
$145,151 in his Eureka Field Nursery stock was reduced to zero as
a result of the $155,440.09 distribution. See sec.
1367(a)(2)(A). As a result, petitioner realized no gross income
from the distribution to the extent of $145,151, his basis in the
Eureka Field Nursery stock. See sec. 1368(b)(1). Accordingly,
respondent asserts that petitioner should realize the amount in
excess of his adjusted basis in his Eureka Field Nursery stock,
$10,289, as gain ($155,440.09 - $145,151 = $10,289.09). See sec.
1368(b)(2). Respondent concedes that his examiner erred by
applying this excess against petitioner’s shareholder loans with
Eureka Field Nursery. Instead, this figure constituted gain to
petitioner. See id.
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