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S corporation distribution regulations.

Ten years after 1982 legislation rewrote the S corporation statutes, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws.  issued proposed regulations providing guidance on distribution and basis rules (proposed regulations 1.1367 and 1.1368, PS264-82).

The regulations provide needed guidance on a number of issues.

* Stock basis. S shareholders have their stock bases increased for income items and decreased by deductions, losses and distributions. While tax practitioners tended to monitor stock basis as an aggregate number for each shareholder under the new regulations, basis recordkeeping on a per share calculation is required.

If the loss or deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs.  allocable al·lo·ca·ble  
Capable of being allocated.

Adj. 1. allocable - capable of being distributed
allocatable, apportionable

distributive - serving to distribute or allot or disperse
 to a share exceeds its basis, the excess is applied to reduce the remaining bases of other shares of stock owned by the shareholder in proportion to the remaining basis of each of those shares.

This procedure would entail entail, in law, restriction of inheritance to a limited class of descendants for at least several generations. The object of entail is to preserve large estates in land from the disintegration that is caused by equal inheritance by all the heirs and by the ordinary  extra recordkeeping for S shareholders who acquired their stock at different prices.

* Debt basis. For S shareholders who have made direct loans to an S corporation, pass-through losses may be claimed to the extent of both stock basis and debt basis.

After debt basis is reduced by pass-through losses, it later may be restored by undistributed S Adj. 1. undistributed - (of investments) not distributed among a variety of securities
undiversified - not diversified
 net income.

The regulations confirm that debt basis is reduced only for debts held at corporate tax yearend and that subsequent basis restoration occurs only for debt held on the first day of the tax year.

Furthermore, the regulations clarify basis restoration procedures when the shareholder had multiple loans with the S corporation during a tax year.

* Former previously taxed income. Before the law was rewritten in 1982, income taxed to an S shareholder but not withdrawn was known as previously taxed income. The regulations confirm that S shareholders with old previously taxed income balances may withdraw these amounts tax free to the extent there is an actual distribution of money in excess of the corporate accumulated ac·cu·mu·late  
v. ac·cu·mu·lat·ed, ac·cu·mu·lat·ing, ac·cu·mu·lates
To gather or pile up; amass. See Synonyms at gather.

To mount up; increase.
 adjustments account (the post-1982 version of previously taxed income).

* Election to alter distribution tiers. IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel.  section 1368 provides a favorable fa·vor·a·ble  
1. Advantageous; helpful: favorable winds.

2. Encouraging; propitious: a favorable diagnosis.

 set of distribution tiers, treating withdrawals from S corporations as coming first from the nontaxable accumulated adjustments account and previously taxed income before reaching the harmful "earnings and profits" dividend tier.

On rare occasions, such as when an S corporation desires to strip out its earnings and profits to eliminate a section 1375 passive investment tax, it is advantageous to make an election to alter these distribution rules so as to first withdraw from the earnings and profits layer.

While the code simply allowed an election to bypass the accumulated adjustments account to meet this objective, the new regulations give additional flexibility by allowing an election to bypass any previously taxed income layer, along with a deemed dividend election for entities with insufficient cash to make an actual earnings and profits distribution.

* Election in case ofpartial disposition of stock. Under current law, a shareholder who disposes of an interest in an S corporation before yearend cannot be certain of the tax consequences because the income or loss allocation will involve a pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or share.

In a Bankruptcy case, when the debtor is insolvent, creditors generally agree to accept a pro rata share of what is owed to them.
 share of the entire year's operations.

To alleviate Alleviate
To make something easier to be endured.

Mentioned in: Kinesiology, Applied
 this uncertainty, the proposed regulations provide that, if a shareholder disposes of 20% or more of the corporation's issued stock during any 30-day period during the corporation's tax year, the corporation may elect to close its books on the date of the 20%-ormore disposition in order to allocate income or loss among the shareholders for the S year.

Observation: These proposals would not be effective until S corporation tax years beginning after final regulations are issued. Hearings on the proposals are scheduled for September.
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Publication:Journal of Accountancy
Date:Sep 1, 1992
Previous Article:Deducting points.
Next Article:Taxpayers face diversity in state appeals procedures.

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