Page:United States Statutes at Large Volume 96 Part 2.djvu/318

 96 STAT. 1680

PUBLIC LAW 97-354—OCT. 19, 1982 creased or decreased by any adjustment of such amount in a redetermination of the shareholder's tax liability. "(2) ADJUSTMENTS IN BASIS OF INDEBTEDNESS.— "(A) REDUCTION OF BASIS.—If for any taxable year the

Ante, p. 1677.

26 USC 1368.

amounts specified in subparagraphs (B), (C), (D), and (E) of subsection (a)(2) exceed the amount which reduces the shareholder's basis to zero, such excess shall be applied to reduce (but not below zero) the shareholder's basis in any indebtedness of the S corporation to the shareholder. "(B) RESTORATION OF BASIS.—If for any taxable year there is a reduction under subparagraph (A) in the shareholder's basis in the indebtedness of an S corporation to a shareholder, any net increase (after the application of paragraphs (1) and (2) of subsection (a)) for any subsequent taxable year shall be applied to restore such reduction in basis before any of it may be used to increase the shareholder's basis in the stock of the S corporation. "(3) COORDINATION WITH SECTION 165(g).—This section and section 1366 shall be applied before the application of section 165(g) to any taxable year of the shareholder or the corporation in which the stock becomes worthless. "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 N O 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 distri-

bution 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). "(d) CERTAIN ADJUSTMENTS TAKEN INTO ACCOUNT.—Subsections

Ante, p. 1679.

(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

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