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The record in these cases fails to establish that Tomson had
accumulated earnings and profits as of the end of 1998 or 1999.
Therefore, section 1368(b) sets out the manner in which the
distributions will be treated. Sec. 1.1368-1(c), Income Tax
Regs. Under section 1368(b)(1), a distribution shall not be
included in a shareholder’s gross income to the extent that it
does not exceed the shareholder’s adjusted basis in the
corporation’s stock. If the amount of the distribution exceeds
the shareholder’s adjusted basis in the corporation’s stock, such
excess shall be treated as gain from the sale or exchange of
property. Sec. 1368(b)(2).
With respect to 1998, the $101,000 distribution that the
Gownis received from Tomson should be included in income only to
the extent that it exceeds the Gownis’ basis in their Tomson
stock, which, as discussed above, must be determined by taking
into account the Gownis’ share of the gain recognized by Tomson
on its sale to Sembler. The portion of this distribution that is
a nontaxable return of capital must be taken into account under
section 1367(a)(2) and must decrease the Gownis’ basis in their
Tomson stock accordingly. These calculations should be made
incident to Rule 155 computations in these cases.
With respect to 1999, the $50,610 distribution that the
Gownis received from Tomson should be included in income only to
the extent that it exceeds the Gownis’ basis in their Tomson
stock as calculated at the end of 1998. The portion of this
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