Final Regulations Issued on S Corporation Distributions

The CPA Journal, March 1994 | Go to article overview

Final Regulations Issued on S Corporation Distributions


The IRS has issued final regulations on adjustments to basis of stock and indebtedness to shareholders of S corporations and treatment of distributions by S corporations to shareholders. Except for certain modifications, the final regulations are similar to the proposed regulations.

The proposed and final regulations provide a separate basis approach for determining adjustments to the basis of a shareholder's stock in a S corporation similar to that used for the basis of a shareholder in a C corporation. The regulations provide a "spillover rule" that allows a shareholder to apply losses and deductions in excess of the basis of an individual block of stock to which such items are attributable against the remaining bases of all other blocks of stock owned by a shareholder. The final regulations clarify that the spillover rule applies to basis adjustments for distributions to shareholders as well as to adjustments for pro rata shares of passthrough items of losses or deductions.

Adjustments are made to the basis of a share of stock in the following order: 1) increases for income items including tax-exempt income and the excess of deductions for depletion over basis for non-oil and gas properties; 2) decreases for noncapital, nondeductible expenses, and certain oil and gas depletion deductions; 3) decreases for items of loss or deduction; and 4) decreases for distributions. …

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Final Regulations Issued on S Corporation Distributions
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