26 U.S.C. § 1368 — Distributions

(a) An S-corporation^* property distribution concerning its stock^* that would otherwise be covered by section 301(c) is treated under (b) or (c), whichever applies. (b) If the corporation has no accumulated earnings and profits, the distribution is not gross income up to the stock’s adjusted basis. Any excess is gain from selling or exchanging property. (c) If it has accumulated earnings and profits: (1) the part not exceeding the accumulated adjustments account is treated under (b); (2) the next part is a dividend up to accumulated earnings and profits; and (3) the remainder is treated under (b). Unless regulations provide otherwise, if yearly distributions exceed the account’s year-end amount, the account balance is allocated among distributions in proportion to their sizes. (d) Apply (b) and (c) with proper account taken of stock-basis adjustments under section 1367 and accumulated-adjustments-account changes under (e)(1). For a distribution during the year, determine stock basis using that year’s section 1367(a)(1) adjustments. (e)(1)(A) “Accumulated adjustments account” generally means the S corporation’s account adjusted for its S period like section 1367, except tax-exempt income and related expenses do not adjust it, the “not below zero” rule is ignored, and Federal taxes from C-corporation years do not adjust it. (B) For a redemption treated as an exchange under section 302(a) or 303(a), reduce the account in the same ratio as redeemed shares^* bear to shares before redemption. (C)(i) For distributions during a year, determine the year-end account without the year’s net negative adjustment. (ii) “Net negative adjustment” is reductions other than distributions minus increases, when positive. (2) “S period” means the latest continuous period the corporation was an S corporation^*, excluding years beginning before January 1, 1983. (3)(A) With all affected shareholders’ consent, an S corporation may elect not to apply (c)(1) to all distributions in the election year. (B) “Affected shareholder^*” means anyone receiving a distribution that year. (f) If a director receives a distribution, not as payment for stock, for restricted bank-director stock defined in section 1361(f), the amount is included in the director’s gross income and deductible by the corporation for the corporation’s year that includes the director’s income year.