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Posted by Vijay Sharma on June 10, 2006, 4:19 pm
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Ed Zollars, CPA wrote:
> Vijay Sharma wrote:
>> If I maintain separate accounts on the books for investment
>> and retained earnings (profit & loss), for distribution
>> purposes what do I pay out of first - retained earnings or
>> investment? Assume on prior C Corp earnings or PTI.
> It doesn't matter if you maintain different books--the
> distributions are governed by =A71368 which is concerned
> primarily with whether or not you have earnings and profits.
> In that case, distributions offset basis of the
> shareholder, then create capital gain (=A71368(b)).
>> If the distribution exceeds the shareholder basis
>> (investment + profit - loss - previous distribution), isn't
>> the excess treated as a capital gain to the shareholders?
> Yes, per =A71368(b)(2).
>> Correct me if I am wrong - this capital gain would go on
>> Schedule K (lines 7 or 8 on Form 1120S and lines 8 or 9 on
>> Form 1065), then to K-1s and Schedule Ds.
> This is a shareholder calculation, not a corporate one, so
> the K-1 only reports the total distribution. The taxpayer
> computes the effect of distributions and then would report
> any excess of distributions over basis on Schedule D. But
> the K-1 would not "pass out" any capital gain--that's only
> for gains recognized in the corporation itself.
>> In the situation above, is the total distribution paid
>> compared to the shareholder basis in total (of all
>> shareholders - as on the balance sheet) or distribution
>> amount to each shareholder compared to his/her basis?
> =A71368 is applied on a shareholder by shareholder basis,
> since shareholders don't have to have proportionate basis
> (such as if one purchased his shares or obtained them long
> after startup, or inherited the shares which would obtain a
> basis adjustment to FMV on the date of death or the
> alternate valuation date, as applicable).
>> In
>> the latter case, some shareholders' distribution could
>> exceed their basis and some would not, depending on each
>> case.
> That's correct--that's why it's a shareholder by shareholder
> calculation and why the corporation doesn't report it.
Thanks a lot for a very comprehensive reply.
Does the above answers hold true for a LLC as well, electing
to be taxed as a Partnership?
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