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property. Sec. 1.1012-1(a), Income Tax Regs. Section 1367
specifies adjustments to basis applicable to investments in S
corporations. Basis in S corporation stock is increased by
income passed through to the shareholder under section 1366(a)(1)
and decreased by, inter alia, distributions not includable in the
shareholder’s income pursuant to section 1368; items of loss and
deduction passed through to the shareholder under section
1366(a)(1); and certain nondeductible, noncapital expenses. Sec.
1367(a).
B. Distributions
Section 1368 addresses the treatment of distributions and
differentiates S corporations having accumulated earnings and
profits by reason of prior periods of operation as a C
corporation and those without. For S corporations with
accumulated earnings and profits, dividend treatment applies in
enumerated circumstances. Sec. 1368(c). The typical rule for
entities without accumulated earnings and profits, such as Wright
& Associates, is that distributions are not included in a
shareholder’s gross income to the 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).
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