- 9 -
related penalty under section 6662 of $107,622.80. The Hursts
were Michigan residents when they filed their petition, and trial
was held in Detroit.
OPINION
Figuring out whether the Hursts or the Commissioner is right
requires some background vocabulary. In tax law, a corporation’s
purchase of its own stock is called a “redemption.” Sec. 317(b).
The Code treats some redemptions as sales under section 302, but
others as a payment of dividends to the extent the corporation
has retained earnings and profits, with any excess as a return of
the shareholder’s basis, and any excess over basis as a capital
gain. Distributions characterized as dividends, return of basis,
or capital gains are commonly called “section 301 distributions,”
after the Code section that sets the general rules in this area.
The rules for redemptions and distributions from S corpora-
tions, which are found in section 1368 and its regulations, add a
layer of complexity, especially when the corporation has accumu-
lated earnings and profits (as both HMI and RHI did). These
rules require computation of an “accumulated adjustments ac-
count,” an account which tracks the accumulation of previously
taxed, but undistributed, earnings of an S corporation. Distri-
butions up to the amount of the accumulated adjustments account
are generally tax free to the extent they do not exceed a share-
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011