Shareholder took substantial distributions in excess of accumulated adjustments account. I know that this should be reported to the shareholder as a capital gain, but how is it reported on the balance sheet? It can't be from AAA, so not sure where to go with it. Also --does the capital gain reported by the shareholder increase his basis?
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Two answers
The excess to be reported is the excess of basis, and not AAA. They are similar, but differ in a few minor elements, mainly non-taxable income and non-deductible expenses.
See TTB page 24-5
When the distributions exceed basis, then basis is zero. Basis is not increased by virtue of reporting a capital gain.
The excess distributions should appear as a debit to retained earnings, under most scenarios. When retained earnings becomes a debit, it is called a deficit. If in excess of basis, this should most likely translate into a net debit for the entire equity section, not just retained earnings.
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