26 C.F.R. § 1.1368-3 Examples
| Library | Code of Federal Regulations |
| Edition | 2023 Edition |
| Currency | Current through September 30, 2023 |
The principles of §§1.1368-1 and 1.1368-2 are illustrated by the examples below. In each example Corporation S is a calendar year corporation:
Example 1.
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(i) Corporation S, an S
corporation, has no earnings and profits as of January 1, 1996, the first day
of its 1996 taxable year. S's sole shareholder, A, holds 10 shares of S stock
with a basis of $1 per share as of that date. On March 1, 1996, S makes a
distribution of $38 to A. For S's 1996 taxable year, A's pro rata share of the
amount of the items described in section 1367(a)(1) (relating to increases in
basis of stock) is $50 and A's pro rata share of the amount of the items
described in section 1367(a)(2) (B) through (D) (relating to decreases in basis
of stock for items other than distributions) is $26.
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(ii) Under section 1368(d)(1) and
§1.1368-1(e)(1), the adjustments to the bases of A's stock in S described
in section 1367 are made before the distribution rules of section 1368 are
applied. Thus, A's basis per share in the stock is $3.40 ($1 + [($50-$26) / 10
shares]) before taking into account the distribution. Under section
1367(a)(2)(A), the basis of A's stock is decreased by distributions to A that
are not includible in A's income. Under §1.1367-1(c)(3), the amount of the
distribution that is attributable to each share of A's stock is $3.80 ($38
distribution / 10 shares). However, A only has a basis of $3.40 in each share
and basis may not be reduced below zero. Therefore, the basis of each share of
his stock is reduced by $3.40 to zero, and the remaining $4.00 of the
distribution ([$3.80-$3.40] * 10 shares) is treated as gain from the sale or
exchange of property. As of January 1, 1997, A has a basis of $0 in his shares
of S stock.
Example 2.
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(i) Corporation S, an S
corporation, has no earnings and profits as of January 1, 2001, the first day
of its 2001 taxable year. S's sole shareholder, A, holds 10 shares of S stock
with a basis of $1 per share as of that date. On March 1, 2001, S makes a
distribution of $38 to A. The balance in Corporation S's AAA is $100. For S's
2001 taxable year, A's pro rata share of the amount of the items described in
section 1367(a)(1) (relating to increases in basis of stock) is $50. A's pro
rata share of the amount of the items described in sections 1367(a)(2)(B)
through (D) (relating to decreases in basis of stock for items other than
distributions) is $26, $20 of which is attributable to items described in
section 1367(a)(2)(B) and (C) and $6 of which is attributable to items
described in section 1367(a)(2)(D) (relating to decreases in basis attributable
to noncapital, nondeductible expenses).
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(ii) Under section 1368(d)(1) and
§1.1368-1(e)(1) and (2), the adjustments to the basis of A's stock in S
described in sections 1367(a)(1) are made before the distribution rules of
section 1368 are applied. Thus, A's basis per share in the stock is $6.00 ($1 +
[$50/10]) before taking into account the distribution. Under section
1367(a)(2)(A), the basis of A's stock is decreased by distributions to A that
are not includible in A's income. Under §1.1367-1(c)(3), the amount of the
distribution that is attributable to each share of A's stock is $3.80 ($38
distribution/10 shares). Thus, A's basis per share in the stock is $2.20
($6.00-$3.80), after taking into account the distribution. Under section
1367(a)(2)(D), the basis of each share of A's stock in S after taking into
account the distribution, $2.20, is decreased by $.60 ($6...
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