§1368 Distributions

Summary

Tells how payments from an S corporation to a shareholder are taxed. If the S corporation has no accumulated earnings and profits, a cash or property payment reduces the shareholder’s stock basis first. Any amount above that basis is treated as a gain from selling property. If the S corporation does have accumulated earnings and profits, the payment is split in order: first, an amount up to the corporation’s accumulated adjustments account (AAA) is treated like the no-earnings rule above (basis reduction then gain); next, an amount up to the corporation’s accumulated earnings and profits is treated as a dividend; any leftover amount after that is treated like the no-earnings rule again. If total payments in a year exceed the AAA, the AAA balance is divided among those payments in proportion to their amounts. The rules use the shareholder’s basis adjustments under section 1367 and special AAA rules. Short definitions: accumulated adjustments account (AAA) — an account tracking S-period earnings adjusted like the basis rules; S period — the most recent continuous time the corporation has been an S corporation (not before January 1, 1983); affected shareholder — anyone who gets a distribution that year. With all affected shareholders’ consent, the S corporation can elect to treat distributions differently. For certain restricted bank director stock, the director must report the payment as income and the corporation may deduct it.