Frequently Asked Questions
Who is eligible for the Tax-Free Distributions of Basis?
Applies to S corporations with no accumulated earnings and profits, or distributions from the Accumulated Adjustments Account (AAA).
How does the Tax-Free Distributions of Basis work?
Distributions to shareholders are tax-free to the extent they do not exceed the shareholder's adjusted basis in the stock.
What law authorizes the Tax-Free Distributions of Basis?
The Tax-Free Distributions of Basis is authorized under IRC §1368(b) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §1368
Source: Internal Revenue Code, Title 26, United States Code
§ 1368. Distributions(a) General ruleA distribution of property made by an S corporation with respect to its stock to which (but for this subsection) section 301(c) would apply shall be treated in the manner provided in subsection (b) or (c), whichever applies.
(b) S corporation having no earnings and profitsIn the case of a distribution described in subsection (a) by an S corporation which has no accumulated earnings and profits—(1) Amount applied against basisThe distribution shall not be included in gross income to the extent that it does not exceed the adjusted basis of the stock.
(2) Amount in excess of basisIf the amount of the distribution exceeds the adjusted basis of the stock, such excess shall be treated as gain from the sale or exchange of property.
(c) S corporation having earnings and profitsIn the case of a distribution described in subsection (a) by an S corporation which has accumulated earnings and profits—(1) Accumulated adjustments accountThat portion of the distribution which does not exceed the accumulated adjustments account shall be treated in the manner provided by subsection (b).
(2) DividendThat portion of the distribution which remains after the application of paragraph (1) shall be treated as a dividend to the extent it does not exceed the accumulated earnings and profits of the S corporation.
(3) Treatment of remainderAny portion of the distribution remaining after the application of paragraph (2) of this subsection shall be treated in the manner provided by subsection (b).
Except to the extent provided in regulations, if the distributions during the taxable year exceed the amount in the accumulated adjustments account at the close of the taxable year, for purposes of this subsection, the balance of such account shall be allocated among such distributions in proportion to their respective sizes.
(d) Certain adjustments taken into accountSubsections (b) and (c) shall be applied by taking into account (to the extent proper)—(1) the adjustments to the basis of the shareholder’s stock described in section 1367, and
(2) the adjustments to the accumulated adjustments account which are required by subsection (e)(1).
In the case of any distribution made during any taxable year, the adjusted basis of the stock shall be determined with regard to the adjustments provided in paragraph (1) of section 1367(a) for the taxable year.
Showing first 3,000 characters of full section text.