Excess Distribtuion of Shareholder Distribution

[peggysioux]

Excess distribution of shareholder distribution is taxed on shareholder's individual tax return as capital gain. My question is "is the capital gain due to excess distribution added to shareholder basis?".

A fellow EA is stating the above, but in my research, I am unable to find verification. EA is providing me the following info:

"1366(a)(1)(A)

Items of income (including tax-exempt income), loss, deduction, or credit the separate treatment of which could affect the liability for tax of any shareholder, and

1366(a)(1)(B)


Nonseparately computed income or loss.


Please note the section above which states that any item of income which could affect the liability of the shareholder factors into the determination of basis. The cap gain causes tax liability of the TP to increase, and therefore, I believe the TP’s basis also increases"


Would appreciate other tax preparers' input on the handling of the capital gain and increase in basis.

Peggy Sioux

[BHoffman]

The reason for taxing excess distributions as capital gains is the assumption that the shareholder has actually sold a portion of his stock. That transaction would not result in an increase to his basis.

[peggysioux]

Excess Distribution of Shareholder Distribution

The reason for taxing excess distributions as capital gains is the assumption that the shareholder has actually sold a portion of his stock. That transaction would not result in an increase to his basis.

Thank you for your input. The increase in basis did not make sense to me and I could find nothing that backed it up, but wanted to make sure I was correct and not shorting my taxpayer.

Thank you again.

Peggy Sioux