§1368 Distributions

Summary

S corporations must follow rules for giving property to shareholders. If the corporation has no accumulated earnings and profits, a distribution is tax-free up to the shareholder’s stock basis. Any amount above that basis is treated as a gain from selling property. If the corporation does have accumulated earnings and profits, the distribution is split: first it uses the company’s accumulated adjustments account (AAA) and follows the no‑earnings rule above; next, any amount up to the accumulated earnings and profits is treated as a dividend; any leftover amount after that is treated like the no‑earnings rule again. You must also adjust the shareholder’s stock basis and the AAA the way the tax rules require when making these calculations. Definitions and special rules: the accumulated adjustments account (AAA) is an account that tracks S‑period tax items similar to the adjustments in section 1367, but it ignores tax‑exempt income and does not include taxes from years the company was a C corporation. For share redemptions treated as exchanges, the AAA is reduced in proportion to shares redeemed. The “S period” means the latest continuous time the company has been an S corporation and does not include any year that began before January 1, 1983. An S corporation can choose, with the consent of all shareholders who get distributions that year, not to apply the AAA-first rule for that year. Separately, a director who gets a non‑exchange distribution on restricted bank director stock must include that amount in income, and the company may deduct it in the year the director reports it.