S Corp Good One - Please read

[Snaggletooth]

It is typical for S Corps to pay their shareholders dividends when their taxes are due. If estimated payments are required, these dividends are often declared four times annually.

Please focus on the basis calculation for shareholders. Notwithstanding a few other possible transactions, the heart of this calculation is a PLUS for income and a MINUS for dividends.

Moneybags, Inc. is a calendar year S corp and has ended its taxable year on 12/31/10.
On 01/14/11 Moneybags declares dividends so the shareholders will have the funds to make their fourth installment for 2010.

Question: Into which year does the 01/14/11 dividend enter the basis calculation?
a. 2011 because the shareholders are calendar-year taxpayers.
b. 2010 because this dividend was to apply for shareholders' 2010 taxes.

Assume no other factors (PTI, exhaustion of basis, etc.) other than those given.

[Gretel]

I vote for c. 2090 because S/H wants to be able to deduct more losses.

[JohnH]

Well, First I'd say these are distributions, not dividends. And there is a definite ordering rule for classifying the distributions - they first come out of PTI, then out of current years earnings.

So the 1/14/11 payment is a distribution from PTI unless it has been exhausted. If PTI has been exhausted, then it's a distribution from current year's income. And if the current year doesn't produce enough income to cover the distribution from current years earnings, then all or part of the distribution will be capital gain. (unless the Corp was previously a C-Corp with locked-up earnings and profits. In that case, the distribution would be a dividend paid out of E&P which as i understand it is the only way you can get a dividend out of an S-Corp)

Basis adjustments would also follow the above rules, except that basis can never reduce below zero. That's why ther's the capital gains rule - it has to come from somewhere.

Is that right?

[Corduroy Frog]

Thanks but

Thanks for your usual acumen, John, and I believe all you say is correct about such features as AGI, PTI, exhaustion of basis, etc.

Assume the corporation has always been profitable, so that the answer can be had simply, without all the possible peripheral issues which may beguile the situation from the relevance of the question.

Your input appreciated, as always.

[BHoffman]

Well, First I'd say these are distributions, not dividends. And there is a definite ordering rule for classifying the distributions - they first come out of PTI, then out of current years earnings.

So the 1/14/11 payment is a distribution from PTI unless it has been exhausted. If PTI has been exhausted, then it's a distribution from current year's income. And if the current year doesn't produce enough income to cover the distribution from current years earnings, then all or part of the distribution will be capital gain. (unless the Corp was previously a C-Corp with locked-up earnings and profits. In that case, the distribution would be a dividend paid out of E&P which as i understand it is the only way you can get a dividend out of an S-Corp)

Basis adjustments would also follow the above rules, except that basis can never reduce below zero. That's why ther's the capital gains rule - it has to come from somewhere.

Is that right?

Hi John - according to IRC Sec. 1367, shareholder basis is decided at 12/31 for a calendar year taxpayer, so basis at the time of distribution doesn't matter. It's how things end up at 12/31.

Distributions are cash basis and would be recognized in the year received by the shareholder, not in the year "accrued".

[ChEAr$]

Hi John - according to IRC Sec. 1367, shareholder basis is decided at 12/31 for a calendar year taxpayer, so basis at the time of distribution doesn't matter. It's how things end up at 12/31.

Distributions are cash basis and would be recognized in the year received by the shareholder, not in the year "accrued".

Also FIFO. (grin