- 15 - and profits by reason of prior periods of operation as a C corporation and those without. The typical rule for entities without earnings and profits is that distributions are not included in a shareholder’s gross income to extent that they do not exceed the adjusted basis of his or her stock (but are applied to reduce basis), while any distribution amount in excess of basis is treated as gain from the sale or exchange of property. Sec. 1368(b). For S corporations with accumulated earnings and profits, dividend treatment applies in enumerated circumstances. Sec. 1368(c). III. Analysis The crux of the dispute between the parties here involves the amount of NOL that petitioners are entitled to claim with respect to Alofs and Target in 1996 and to carry back to 1993, 1994, and 1995. This computation turns on determination of Mr. Gleason’s basis in Alofs and Target, as basis limits the allowable loss pursuant to section 1366(d)(1). Likewise, the basis calculation will be affected by issues pertaining to Mr. Gleason’s pro rata share of ordinary income and distributions, as these will generate adjustments to basis under section 1367(a). A. Pro Rata Ordinary Income From Schedules K-1 Respondent contends that petitioners’ income for 1995 should be adjusted to reflect an additional $438,571 as Mr. Gleason’sPage: Previous 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Next
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