Current through Register Vol. 43, No. 02, November 27, 2024
(1) Treatment of
Property Distributions. An actual distribution of property (not the prorata
share taken into account under §
40-18-162, Code of
Ala. 1975) by an Alabama S Corporation in accordance with the
provisions of §
40-18-36, will be treated in the
following manner:
(a) If the Alabama S
corporation has no accumulated earnings and profits (from any year in which an
Alabama S election was not in effect or from a merger), the distribution will
not be included in the shareholder's gross income to the extent the
distribution does not exceed the adjusted basis of the stock.
1. To the extent the distribution exceeds the
shareholder's adjusted basis in the stock of the Alabama S corporation, the
excess will be treated as a gain from the sale or exchange of
property.
(b) If the
Alabama S corporation has accumulated earnings and profits (from any year in
which an Alabama S election was not in effect or from a merger), and the
distribution does not exceed the Alabama Accumulated Adjustments Account, the
distribution will not be included in the shareholder's gross income to the
extent of the shareholder's adjusted basis of the stock.
1. To the extent the distribution exceeds the
shareholder's adjusted basis of the stock, the distribution will be included in
the shareholder's gross income as a dividend to the extent that it does not
exceed the corporation's Alabama accumulated earnings and profits.
2. To the extent the distribution exceeds the
corporation's Alabama accumulated earnings and profits, but not the Alabama
Accumulated Adjustments Account (after application of subparagraph (b) above),
the excess will not be included in the shareholder's gross income.
3. To the extent the distribution exceeds the
corporation's Alabama accumulated earnings and profits and the Alabama
Accumulated Adjustments Account, the excess will be treated as a gain from the
sale or exchange of property.
(2) In applying the rules of this section,
the shareholder's basis in his or her stock will first be adjusted as provided
in Rule 810-3-164-.01 and the Alabama
Accumulated Adjustments Account adjusted as provided in Rule
810-3-166-.01.
(3) Special Election. As provided in §
40-18-166(b), the
Alabama S corporation may elect, with the consent of all the affected
shareholders, to treat all distributions made during the taxable year as
distributions first from accumulated earnings and profits rather than from the
Alabama Accumulated Adjustments Account. See Rule 810-3-166.01.
(4) Nonresident Shareholders. Nonresident
shareholders who receive distributions under the provisions of this regulation
are not required to include such amounts in their Alabama nonresident income
tax returns, except when paragraph (3) above applies.
(5) Examples. The following examples will
serve to illustrate the operation of this regulation:
(a)
1.
Jones is the 100% shareholder of Acme, Inc., an Alabama S corporation which has
its first year of existence in 1985, and therefore has no accumulated earnings
and profits. All its income and deductions are attributed to Alabama. Jones'
basis in his Acme stock at January 1, 1985 is $1,000.
2. Acme reports the following on its tax
return for the year ended December 31, 1985:
Non-separately stated income $1,500
Distribution to Jones on 10/31/85 2,000
3. Jones' adjusted basis in his Acme stock at
December 31, 1985, before giving effect to the distribution, is computed as
follows:
Basis at January 1, 1985 $1,000
Non-separately stated income for 1985 1,500
Basis on December 31, 1985 $2,500
4. The entire distribution to Jones on
10/31/85 is a non-taxable return of his basis. After giving effect to the
distribution, Jones' basis is his Acme stock at December 31, 1985 is
$500.
(b) The facts are
the same as in example (a) above, except that the distribution to Jones on
October 31, 1985, is $3,000.
1. The
distribution to Jones is characterized as a non-taxable return of his basis to
the extent of his adjusted basis before giving effect to the distribution. The
excess of this distribution over his basis is taxed as a gain from the sale or
exchange of his Acme stock. His adjusted basis on December 31, 1985 is $2,500
before recognizing the distribution (see example (a)3, above). Therefore, Jones
has a non-taxable return of basis of $2,500 and a gain from the exchange of his
stock of $500.
(c) The
facts are the same as in the example (b) above, except that Acme has
accumulated earnings and profits from prior C corporation years in the amount
of $3,000.
1. Acme's accumulated adjustments
account at December 31, 1985, before giving effect to the distribution is
$1,500, the amount of the non-separately stated income. The $3,000 distribution
to Jones on October 31, 1985, is characterized as follows:
Non-taxable restoration of basis to the extent of the Alabama
Accumulated Adjustments Account $1,500
Taxable dividend paid from accumulated earnings and profits
$1,500
Total Distribution $3,000
2. Jones' basis in his Acme stock at December
31, 1985, after giving effect to the distribution is $1,000. The balance in
Acme's accumulated earnings and profits account at December 31, 1985, after
giving effect to the distribution, is $1,500.
(d) The facts are the same as in example (c)
above, except that Acme, with Jones' consent, has elected under Rule
810-3-166-.01 to treat all
distributions in the taxable year as coming first from accumulated earnings and
profits.
1. The entire distribution is
characterized as a taxable dividend paid from accumulated earnings and profits.
Jones' basis in his Acme stock at December 31, 1985 is $2,500, and the balance
in Acme's accumulated adjustments account at December 31, 1985 is $1,500. Acme
has no accumulated earnings and profits at December 31, 1985, after giving
effect to the distribution.
(6) For tax years beginning after December
31, 1996, adjustments for distributions are made before applying the loss
limitation. The stock basis is adjusted by the positive adjustments under Rule
810-3-164-.01 but is not
decreased by any of the negative adjustments before taking into account any
distributions.
Authors: Verlon Frost, Catherine McCary, Ann
Winborne, CPA, Charlotte Jordan, Ed Cutter, CPA
Statutory Authority: Code of Ala.
1975, §§
40-2A-7(a)(5),
40-18-165.
History: Adopted November 13, 1985. Filed July 22,
1992; October 30, 1992. Amended: Filed March 26, 1998; effective
April 30, 1998. Amended: Filed March 31, 2000; effective May 5,
2000.