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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’s
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