Internal Revenue Code:Sec. 1368. Distributions

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Contents


Location in Internal Revenue Code


     TITLE 26 - INTERNAL REVENUE CODE
      Subtitle A - Income Taxes
       CHAPTER 1 - NORMAL TAXES AND SURTAXES
        Subchapter S - Tax Treatment of S Corporations and Their
              Shareholders
          PART II - TAX TREATMENT OF SHAREHOLDERS
        

Statute

    Sec. 1368. Distributions
 
    (a) General rule
      A distribution of property made by an S corporation with respect
    to its stock to which (but for this subsection) section 301(c)
    would apply shall be treated in the manner provided in subsection
    (b) or (c), whichever applies.
    (b) S corporation having no earnings and profits
      In the case of a distribution described in subsection (a) by an S
    corporation which has no accumulated earnings and profits -
      (1) Amount applied against basis
        The distribution shall not be included in gross income to the
      extent that it does not exceed the adjusted basis of the stock.
      (2) Amount in excess of basis
        If the amount of the distribution exceeds the adjusted basis of
      the stock, such excess shall be treated as gain from the sale or
      exchange of property.
    (c) S corporation having earnings and profits
      In the case of a distribution described in subsection (a) by an S
    corporation which has accumulated earnings and profits -
      (1) Accumulated adjustments account
        That portion of the distribution which does not exceed the
      accumulated adjustments account shall be treated in the manner
      provided by subsection (b).
      (2) Dividend
        That portion of the distribution which remains after the
      application of paragraph (1) shall be treated as a dividend to
      the extent it does not exceed the accumulated earnings and
      profits of the S corporation.
      (3) Treatment of remainder
        Any portion of the distribution remaining after the application
      of paragraph (2) of this subsection shall be treated in the
      manner provided by subsection (b).
    Except to the extent provided in regulations, if the distributions
    during the taxable year exceed the amount in the accumulated
    adjustments account at the close of the taxable year, for purposes
    of this subsection, the balance of such account shall be allocated
    among such distributions in proportion to their respective sizes.
    (d) Certain adjustments taken into account
      Subsections (b) and (c) shall be applied by taking into account
    (to the extent proper) -
        (1) the adjustments to the basis of the shareholder's stock
      described in section 1367, and
        (2) the adjustments to the accumulated adjustments account
      which are required by subsection (e)(1).
    In the case of any distribution made during any taxable year, the
    adjusted basis of the stock shall be determined with regard to the
    adjustments provided in paragraph (1) of section 1367(a) for the
    taxable year.
    (e) Definitions and special rules
      For purposes of this section -
      (1) Accumulated adjustments account
        (A) In general
          Except as otherwise provided in this paragraph, the term
        ''accumulated adjustments account'' means an account of the S
        corporation which is adjusted for the S period in a manner
        similar to the adjustments under section 1367 (except that no
        adjustment shall be made for income (and related expenses)
        which is exempt from tax under this title and the phrase ''(but
        not below zero)'' shall be disregarded in section 1367(a)(2))
        and no adjustment shall be made for Federal taxes attributable
        to any taxable year in which the corporation was a C
        corporation.
        (B) Amount of adjustment in the case of redemptions
          In the case of any redemption which is treated as an exchange
        under section 302(a) or 303(a), the adjustment in the
        accumulated adjustments account shall be an amount which bears
        the same ratio to the balance in such account as the number of
        shares redeemed in such redemption bears to the number of
        shares of stock in the corporation immediately before such
        redemption.
        (C) Net loss for year disregarded
          (i) In general
            In applying this section to distributions made during any
          taxable year, the amount in the accumulated adjustments
          account as of the close of such taxable year shall be
          determined without regard to any net negative adjustment for
          such taxable year.
          (ii) Net negative adjustment
            For purposes of clause (i), the term ''net negative
          adjustment'' means, with respect to any taxable year, the
          excess (if any) of -
              (I) the reductions in the account for the taxable year
            (other than for distributions), over
              (II) the increases in such account for such taxable year.
      (2) S period
        The term ''S period'' means the most recent continuous period
      during which the corporation has been an S corporation.  Such
      period shall not include any taxable year beginning before
      January 1, 1983.
      (3) Election to distribute earnings first
        (A) In general
          An S corporation may, with the consent of all of its affected
        shareholders, elect to have paragraph (1) of subsection (c) not
        apply to all distributions made during the taxable year for
        which the election is made.
        (B) Affected shareholder
          For purposes of subparagraph (A), the term ''affected
        shareholder'' means any shareholder to whom a distribution is
        made by the S corporation during the taxable year.

    (f) Restricted Bank Director Stock.--If a director receives a 
      distribution (not in part or full payment in exchange for stock)
    from an S corporation with respect to any restricted bank director stock 
    (as defined in section 1361(f)), the amount of such distribu- tion--
            (1) shall be includible in gross income of the director, 
        and
            (2) shall be deductible by the corporation for the taxable 
        year of such corporation in which or with which ends the taxable 
        year in which such amount in included in the gross income of the 
        director.
 

Sources

    (Added Pub. L. 97-354, Sec. 2, Oct. 19, 1982, 96 Stat. 1680;
    amended Pub. L. 97-448, title III, Sec. 305(d)(2), Jan. 12, 1983,
    96 Stat. 2399; Pub. L. 98-369, div.  A, title VII, Sec. 721(r),
    July 18, 1984, 98 Stat. 970; Pub. L. 99-514, title XVIII, Sec.
    1879(m)(1)(B), Oct. 22, 1986, 100 Stat. 2910; Pub. L. 104-188,
    title I, Sec. 1309(a)(2)-(c), Aug. 20, 1996, 110 Stat. 1783.)
 

Miscellaneous

                                 AMENDMENTS

      2007 - PL 110-28
SEC. 8232. TREATMENT OF BANK DIRECTOR SHARES.
    (b) Distributions.--Section 1368 (relating to distributions) is 
amended by adding at the end the following new subsection:
    ``(f) Restricted Bank Director Stock.--If a director receives a 
distribution (not in part or full payment in exchange for stock)
from an S corporation with respect to any restricted bank director stock 
(as defined in section 1361(f)), the amount of such distribu- tion--
            ``(1) shall be includible in gross income of the director, 
        and
            ``(2) shall be deductible by the corporation for the taxable 
        year of such corporation in which or with which ends the taxable 
        year in which such amount in included in the gross income of the 
        director.''.

      1996 - Subsec. (d). Pub. L. 104-188, Sec. 1309(a)(2), inserted at
    end ''In the case of any distribution made during any taxable year,
    the adjusted basis of the stock shall be determined with regard to
    the adjustments provided in paragraph (1) of section 1367(a) for
    the taxable year.''
      Subsec. (e)(1)(A). Pub. L. 104-188, Sec. 1309(c), substituted
    ''as otherwise provided in this paragraph'' for ''as provided in
    subparagraph (B)'' and ''section 1367(a)(2)'' for ''section
    1367(b)(2)(A)''.
      Subsec. (e)(1)(C). Pub. L. 104-188, Sec. 1309(b), added subpar.
    (C).
      1986 - Subsec. (e)(1)(A). Pub. L. 99-514 inserted ''and no
    adjustment shall be made for Federal taxes attributable to any
    taxable year in which the corporation was a C corporation'' before
    period at end.
      1984 - Subsec. (c). Pub. L. 98-369, Sec. 721(r)(2), inserted
    ''Except to the extent provided in regulations, if the
    distributions during the taxable year exceed the amount in the
    accumulated adjustments account at the close of the taxable year,
    for purposes of this subsection, the balance of such account shall
    be allocated among such distributions in proportion to their
    respective sizes.''
      Subsec. (e)(1)(A). Pub. L. 98-369, Sec. 721(r)(1), substituted
    ''(except that no adjustment shall be made for income (and related
    expenses) which is exempt from tax under this title and the phrase
    '(but not below zero)' shall be disregarded in section
    1367(b)(2)(A))'' for ''(except that no adjustment shall be made for
    income which is exempt from tax under this title and no adjustment
    shall be made for any expense not deductible in computing the
    corporation's taxable income and not properly chargeable to capital
    account)''.
      1983 - Subsec. (e)(3). Pub. L. 97-448 added par. (3).
                      EFFECTIVE DATE OF 1996 AMENDMENT
      Amendment by Pub. L. 104-188 applicable to taxable years
    beginning after Dec. 31, 1996, see section 1317(a) of Pub. L.
    104-188, set out as a note under section 641 of this title.
                      EFFECTIVE DATE OF 1986 AMENDMENT
      Amendment by Pub. L. 99-514 applicable to taxable years beginning
    after Dec. 31, 1982, see section 1879(m)(2) of Pub. L. 99-514, set
    out as a note under section 1361 of this title.
                      EFFECTIVE DATE OF 1984 AMENDMENT
      Amendment by Pub. L. 98-369 effective as if included in the
    Subchapter S Revision Act of 1982, Pub. L. 97-354, see section
    721(y)(1) of Pub. L. 98-369, set out as a note under section 1361
    of this title.
                      EFFECTIVE DATE OF 1983 AMENDMENT
      Section 311(c)(4) of Pub. L. 97-448 provided that: ''The
    amendments made by subsection (d) of section 305 (amending this
    section and sections 221, 1374, and 4975 of this title, enacting
    provisions set out as a note under section 1361 of this title, and
    amending provisions set out as a note under section 1361 of this
    title) shall take effect on the date of the enactment of the
    Subchapter S Revision Act of 1982 (Oct. 19, 1982).''
                               EFFECTIVE DATE
      Section applicable to taxable years beginning after Dec. 31,
    1982, see section 6(a) of Pub. L. 97-354, set out as a note under
    section 1361 of this title.
             PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989
      For provisions directing that if any amendments made by subtitle
    A or subtitle C of title XI (Sec. 1101-1147 and 1171-1177) or title
    XVIII (Sec. 1800-1899A) of Pub. L. 99-514 require an amendment to
    any plan, such plan amendment shall not be required to be made
    before the first plan year beginning on or after Jan. 1, 1989, see
    section 1140 of Pub. L. 99-514, as amended, set out as a note under
    section 401 of this title.
 

References

                   SECTION REFERRED TO IN OTHER SECTIONS
      This section is referred to in sections 593, 1367, 1371, 1377 of
    this title.
 

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