Chapter 15 corporate nonliquidating distributions

Distribution source and shareholders' basis for their corporate investment determine the tax consequences of distributions from S corporations.

The regulations being proposed under IRC Secs 13 provide the particulars of adjustments to stock basis and distributions to S corporation stockholders.

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Linda probably participates materially in the corporation, but her adjusted gross income exceeds $150,000, so she does not benefit from the passive activity rental real estate loss exception.

The items comprising her taxable income from the corporation would be: Item Amount Ordinaryincome$188,000 Interestincome8,000 Netlong-termcapitalgain22,000 Charitablecontributions(3,000) Section179expense(7,000) Medicalinsurance premiums(25x$1,200)(300) Total$207,700 The rental real estate loss reported on Form 8582 would be non- deductible (assuming Linda does not have offsetting passive income) and carryover.

The proposals list an ordering rule for the adjustment, either increases or decreases, of stock basis.

They also include provisions on the timing of basis adjustments, basis computations during a loss year, computation of individual stock basis and the categorization of debt as basis.

Basis Computations During a Loos Year A net loss (not including distributions) first reduces the basis for stock, and then reduces the basis of debt owed to the shareholder by the corporation, if any.

Under the proposed regulations, a shareholder's stock basis at the end of a current year that is available to absorb losses is increased by the amount of the shareholder's share of the corporation's separately and non-separately stated income items.The stock basis is reduced by the amount of any separately or non-separately stated loss items.Finally, the tax effect of any distributions the shareholder received during the year is determined.The Timing of Basis Adjustments All basis adjustments are deemed to occur on the last day of the corporation's tax year or on the date the shareholder sells his or her stock, if earlier.Income and loss items affect basis first, followed by distributions.These shareholder assets have tax bases which may change regularly as a result of corporate events.


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