- 8 -
a year subsequent to such a reduction in debt basis, if the
shareholder’s pro rata share of income exceeds the pro rata share
of losses, section 1367(b)(2)(B) and section 1.1367-2(c), Income
Tax Regs., provide that the excess income shall first restore the
shareholder’s debt basis and then restore the shareholder’s stock
basis.7 The reduction of debt basis pursuant to section
1367(b)(2)(A) and section 1.1367-2(b), Income Tax Regs., and the
6(...continued)
is applied to reduce (but not below zero) the basis of any
indebtedness of the S corporation to the shareholder held by the
shareholder at the close of the corporation’s taxable year. Any
such indebtedness that has been satisfied by the corporation, or
disposed of or forgiven by the shareholder, during the taxable
year, is not held by the shareholder at the close of that year
and is not subject to basis reduction.
7Sec. 1.1367-2(c) Restoration of basis--(1) General rule.
If, for any taxable year of an S corporation beginning after
December 31, 1982, there has been a reduction in the basis of an
indebtedness of the S corporation to a shareholder under section
1367(b)(2)(A), any net increase in any subsequent taxable year of
the corporation is applied to restore that reduction. For
purposes of this section, net increase with respect to a
shareholder means the amount by which the shareholder’s pro rata
share of the items described in section 1367(a)(1) (relating to
income items and excess deduction for depletion) exceed the items
described in section 1367(a)(2) (relating to losses, deductions,
noncapital, nondeductible expenses, certain oil and gas depletion
deductions, and certain distributions) for the taxable year.
These restoration rules apply only to indebtedness held by a
shareholder as of the beginning of the taxable year in which the
net increase arises. The reduction in basis of indebtedness must
be restored before any net increase is applied to restore the
basis of a shareholder’s stock in an S corporation. In no event
may the shareholder’s basis of indebtedness be restored above the
adjusted basis of the indebtedness under section 1016(a),
excluding any adjustments under section 1016(a)(17) for prior
taxable years, determined as of the beginning of the taxable year
in which the net increase arises.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Next
Last modified: May 25, 2011