99-32697. Passthrough of Items of an S Corporation to its Shareholders  

  • [Federal Register Volume 64, Number 245 (Wednesday, December 22, 1999)]
    [Rules and Regulations]
    [Pages 71641-71652]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 99-32697]
    
    
    
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    DEPARTMENT OF THE TREASURY
    
    Internal Revenue Service
    
    26 CFR Parts 1 and 602
    
    [TD 8852]
    RIN 1545-AT52
    
    
    Passthrough of Items of an S Corporation to its Shareholders
    
    AGENCY: Internal Revenue Service (IRS), Treasury.
    
    ACTION: Final regulations.
    
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    SUMMARY: This document contains final regulations relating to the 
    passthrough of items of an S corporation to its shareholders, the 
    adjustments to the basis of stock of the shareholders, and the 
    treatment of distributions by an S corporation. Changes to the 
    applicable law were made by the Subchapter S Revision Act of 1982, the 
    Tax Reform Act of 1984, the Tax Reform Act of 1986, the Technical and 
    Miscellaneous Revenue Act of 1988, and the Small Business Job 
    Protection Act of 1996. These regulations provide the public with 
    guidance needed to comply with the applicable law and will affect S 
    corporations and their shareholders.
    
    DATES: Effective Date: These regulations are effective August 18, 1998.
        Applicability Dates: For dates of applicability, see Sec. 1.1366-5, 
    Sec. 1.1367-3, and Sec. 1.1368-4, plus Transition Rule and Effective 
    Date under SUPPLEMENTARY INFORMATION.
    
    FOR FURTHER INFORMATION CONTACT: Concerning the regulations under 
    section 1366, Martin Schaffer, Deane M. Burke, or David Shulman (202) 
    622-3070; concerning the regulations under sections 1367 and 1368, 
    Brenda Stewart, (202) 622-3120.
    
    SUPPLEMENTARY INFORMATION:
    
    Paperwork Reduction Act
    
        The collection of information contained in these final regulations 
    has been reviewed and approved by the Office of Management and Budget 
    in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) 
    under control number 1545-1613. Responses to this collection of 
    information are mandatory.
        An agency may not conduct or sponsor, and a person is not required 
    to respond to, a collection of information unless the collection of 
    information displays a valid control number.
        The burden for this requirement is reflected in the burden of Form 
    1040, ``U.S. Individual Income Tax Return'', and Form 1120S, ``U.S. 
    Income Tax Return for an S corporation''.
        Suggestions for reducing this burden should be sent to the Internal 
    Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, 
    Washington, DC 20224, and to the Office of Management and Budget, Attn: 
    Desk Officer for the Department of the Treasury, Office of Information 
    and Regulatory Affairs, Washington, DC 20503.
        Books or records relating to this collection of information must be 
    retained as long as their contents may become material in the 
    administration of any internal revenue law. Generally, tax returns and 
    tax return information are confidential, as required by 26 U.S.C. 6103.
    
    Background
    
        This document amends 26 CFR part 1 to provide additional rules 
    under sections 1366, 1367, and 1368 relating to the passthrough of 
    items of an S corporation to its shareholders, the adjustments to the 
    basis of stock of the shareholders, and the treatment of distributions 
    by an S corporation.
        On August 18, 1998, the IRS published in the Federal Register (63 
    FR 44181), a notice of proposed rulemaking (REG-209446-82) regarding 
    sections 1366, 1367, and 1368. Comments responding to the proposed 
    regulations were received. The public hearing was canceled because 
    there were no requests to speak. After considering the comments 
    received, the proposed regulations are adopted as amended by this 
    Treasury decision.
    
    Explanation of Revisions and Summary of Comments
    
    1. Aggregation of Deductions From an S Corporation With Deductions From 
    Other Sources
    
        The proposed regulations provide that a shareholder of an S 
    corporation must aggregate its separate deductions and exclusions with 
    the shareholder's pro rata share of the S corporation's separately 
    stated deductions or exclusions in determining the allowable amount of 
    any deduction or exclusion that is subject to a limitation in the Code.
        The proposed regulations provide an example of this rule for 
    property expensed under section 179. A commentator suggested that the 
    example implies that a shareholder must expense its pro rata share of 
    section 179 expense from the S corporation before it can expense any 
    separately acquired property.
        The example is intended to illustrate that a shareholder may 
    expense only up to the amount allowable under section 179 in any given 
    year regardless of whether the property is owned individually or 
    through an S corporation. The example is not intended to imply that a 
    shareholder must elect to expense property held in an S corporation 
    before it can expense any separately acquired property. However, once 
    an S corporation elects to expense property under section 179, a 
    shareholder will generally elect to expense personal property only to 
    the extent the shareholder's pro rata share of the corporation's 
    section 179 expense does not exceed the shareholder's individual 
    limitation under section 179(b). Accordingly, no modifications have 
    been made to the example in the final regulations.
        The commentator also requested that the final regulations provide 
    additional examples that illustrate the aggregation of the 
    shareholder's pro rata share of deductions and exclusions from an S 
    corporation with deductions and exclusions from other sources and the 
    operation of any limitations on those aggregated deductions and 
    exclusions. Specifically, the commentator requested that the final 
    regulations include an example in which the shareholder's aggregate 
    section 179 expenses from several passthrough sources exceeds the 
    maximum section 179 expense allowable. The allocation of the section 
    179 expense among the various sources is more appropriately addressed 
    in the regulations under section 179 and is beyond the scope of these 
    regulations. Accordingly, the final regulations do not adopt this 
    comment.
    
    2. Recharacterization of Gains and Losses at the Shareholder Level
    
        Generally, the items of an S corporation that are passed through, 
    and reported by, a shareholder are characterized at the corporate level 
    in the same manner that partnership items are characterized at the 
    partnership level.
        However, the proposed regulations also contain exceptions to this 
    general rule for contributions of either noncapital gain property or 
    capital loss property if an S corporation is formed or availed of by 
    any shareholder or shareholders for a principal purpose of selling or 
    exchanging the property that in the hands of the shareholder or 
    shareholders would have produced a different character of gain or loss. 
    The character of the gain or loss will be the same as it would have 
    been if the property were in the hands of the shareholder or 
    shareholders at the time of the sale or exchange.
        Commentators suggested that, in the absence of a statutory 
    provision like section 724 in the partnership context,
    
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    the IRS lacked the authority to recharacterize gain or loss at the 
    shareholder level. Thus, the commentators asserted that the final 
    regulations should not adopt the recharacterization rules. 
    Alternatively, the commentators suggested limiting the 
    recharacterization rule to sales or exchanges occurring within a 
    specified time period.
        Unlike the partnership rules, the recharacterization rules in the 
    proposed regulations are limited to transactions in which an S 
    corporation is used for a principal purpose of changing the character 
    of the gain or loss of contributed property. These rules are reasonable 
    approaches to remedying any improper attempts to utilize section 
    1366(b) to avoid tax. The length of time between the contribution of 
    the property to the S corporation and the S corporation's sale or 
    exchange of the property will be a factor considered in evaluating 
    whether the S corporation was availed of for a principal purpose of 
    changing the character of the gain or loss. However, the final 
    regulations do not adopt any particular time period. Thus, the final 
    regulations retain the recharacterization rules as proposed.
    
    3. Gross Income Reporting Requirement
    
        Section 1366(c), like section 702(c) in the partnership context, 
    provides for the passthrough of gross income to a shareholder for 
    federal income tax purposes. Thus, where it is necessary to determine 
    the amount or character of the gross income of a shareholder, the 
    proposed regulations provide that a shareholder's gross income includes 
    the shareholder's pro rata share of the gross income of the S 
    corporation. This amount is the amount of gross income of the 
    corporation used to derive the shareholder's pro rata share of S 
    corporation taxable income or loss.
        A commentator suggested that the rule in the proposed regulations 
    attempts to narrow the disclosure exception under section 6501(e) by 
    applying a pro rata concept with respect to a shareholder's gross 
    income. The commentator recommended that the final regulations not 
    adopt the gross income reporting rules or, alternatively, provide a de 
    minimis exception to the rule for certain shareholders who own minority 
    interests in an S corporation.
        The rule in the proposed regulations parallels the rules for 
    determining the amount of gross income reported by a partner in a 
    partnership. See section 702(c); Sec. 1.702-1(c)(2). Accordingly, the 
    final regulations do not adopt this suggestion.
    
    4. Carryover of Disallowed Losses Under Section 1366(d)
    
        Section 1366(d) provides that a shareholder's disallowed losses and 
    deductions for any taxable year shall be treated as incurred by the 
    corporation in the succeeding taxable year with respect to that 
    shareholder. The proposed regulations provide that a shareholder's 
    losses and deductions disallowed under section 1366(d) are personal to 
    the shareholder and cannot in any manner be transferred to another 
    person. A commentator requested that the final regulations provide an 
    exception to this rule for transferees that have an identity of 
    investment interest or common basis with the transferor, such as when 
    stock is transferred incident to divorce under section 1041.
        Under section 1366(d), the carryover of disallowed losses and 
    deductions is with respect to the shareholder whose investment limited 
    the items of loss or deduction. Thus, the carryover is not available to 
    a transferee who acquires the stock whether by sale, death, gift, or 
    otherwise. Accordingly, the final regulations retain the rule that 
    disallowed losses and deductions are nontransferable.
        The proposed regulations also provide that if a shareholder 
    transfers all of the shareholder's stock in the corporation, any 
    disallowed loss or deduction is permanently disallowed. A commentator 
    suggested that the final regulations permit a former shareholder of an 
    S corporation who subsequently reacquires stock in the S corporation to 
    utilize the losses and deductions previously disallowed to the 
    shareholder.
        Losses and deductions that are disallowed in any taxable year carry 
    over under section 1366(d) to the succeeding taxable year of the 
    corporation with respect to a particular shareholder. If a shareholder 
    completely terminates its interest in the corporation, the shareholder 
    will not be a shareholder in the succeeding taxable year of the 
    corporation and the disallowed losses would not carry over. There is no 
    statutory authority for the carryover of disallowed items if a 
    shareholder is not a shareholder in the year succeeding the 
    disallowance. The disallowed items of loss and deduction are amounts 
    that exceed the shareholder's economic investment in the corporation. 
    Once the shareholder terminates its interest in the corporation, it is 
    not necessary to preserve the shareholder's position in the 
    corporation. Thus, the final regulations do not adopt this 
    commentator's suggestion.
    
    5. Basis in S Corporation Stock Received as a Gift
    
        Section 1366(d)(1) limits the amount of corporate losses and 
    deductions that can pass through to, and be deducted by, a shareholder 
    to the shareholder's adjusted basis in the corporation's stock and debt 
    of the corporation to the shareholder.
        The proposed regulations provide that, for purposes of section 
    1366(d)(1), a shareholder's basis in stock acquired by gift is the 
    basis of the stock used for purposes of determining loss under section 
    1015. Thus, if the fair market value of the stock exceeds the donor's 
    adjusted basis on the date of the gift, for purposes of section 
    1366(d)(1), the adjusted basis of the stock in the hands of the donee 
    is its adjusted basis in the hands of the donor. However, if the 
    donor's adjusted basis in the stock exceeds the stock's fair market 
    value on the date of the gift, for purposes of section 1366(d)(1), the 
    adjusted basis of the stock in the hands of the donee is the stock's 
    fair market value on the date of the gift.
        One commentator argued that the basis for determining loss under 
    section 1015 is applicable only on the disposition of the gifted asset. 
    The basis for determining loss in section 1015 generally does not 
    affect the basis for depreciation or the deductibility of net expenses 
    arising out of the use or operation of the gifted asset.
        The proposed regulations, however, apply the loss basis rule in 
    section 1015 not for purposes of determining the depreciable basis of a 
    gifted asset, but rather for purposes of determining the amount of 
    passthrough losses and deductions (including depreciation deductions 
    and operating losses) that are allowable to a shareholder under section 
    1366. The donee of loss stock cannot dispose of the stock and recognize 
    the loss inherent in the stock on the date of gift. If the donee could 
    use the donor's basis to take depreciation deductions and operating 
    losses of the S corporation, the donee in effect would realize the 
    benefit of the loss inherent in the stock.
        Another commentator agreed that the basis for determining loss in 
    section 1015 ought to be the basis of gifted stock for purposes of 
    section 1366. Thus, the final regulations continue to provide that for 
    purposes of section 1366, the basis of stock acquired by gift is the 
    basis for determining loss under section 1015.
    
    6. Allocation of Disallowed Losses in Certain Corporate Separations
    
        The proposed regulations provide rules for the carryover of 
    disallowed
    
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    losses and deductions in the case of certain corporate reorganizations. 
    In the case of an S corporation that transfers a part of its assets 
    constituting an active trade or business to another corporation in a 
    transaction to which section 368(a)(1)(D) applies, and immediately 
    thereafter the stock and securities of the controlled corporation are 
    distributed in a distribution or exchange to which section 355 (or so 
    much of section 356 as relates to section 355) applies, any disallowed 
    loss or deduction with respect to a shareholder of the distributing 
    corporation immediately before the transaction is allocated between the 
    distributing corporation and the controlled corporation with respect to 
    the shareholder. The proposed regulations provide that the amount of 
    disallowed loss or deduction allocated to the distributing (or 
    controlled) corporation with respect to the shareholder is an amount 
    that bears the same ratio to each item of disallowed loss or deduction 
    as the value of the shareholder's stock in the distributing (or 
    controlled) corporation bears to the total value of the shareholder's 
    stock in the distributing and controlled corporations, in each case as 
    determined immediately after the distribution.
        A commentator suggested that the term value as used in the proposed 
    regulations is ambiguous and that the final regulations should 
    specifically state ``fair market value.'' The commentator also 
    recommended that because the computation of fair market value 
    introduces a host of valuation issues into the transaction, the final 
    regulations should permit an allocation of disallowed losses and 
    deductions based on the relative adjusted bases of the assets of the 
    distributing and controlled corporations. Finally, the commentator 
    requested that the final regulations allow S corporations to allocate 
    disallowed losses and deductions to the controlled or distributing 
    corporation based upon the source of those losses and deductions. The 
    final regulations permit shareholders to allocate disallowed losses and 
    deductions according to any reasonable method, including a method based 
    on the relative fair market value of the shareholder's stock in the 
    distributing and controlled corporations immediately after the 
    distribution, a method based on the relative adjusted bases of the 
    assets in the distributing and controlled corporations immediately 
    after the distribution, or, in the case of losses and deductions 
    clearly attributable to either the distributing or controlled 
    corporation, a method that allocates such losses and deductions 
    accordingly.
    
    7. Allocation of Tax on Passive Investment Income Under Section 
    1366(f)(3)
    
        Section 1366(f)(3) provides that if any tax is imposed under 
    section 1375 for a taxable year, each item of passive investment income 
    is reduced by an amount which bears the same ratio to the amount of the 
    tax as the amount of the item bears to the total passive investment 
    income for the taxable year.
        A commentator requested guidance in the final regulations on 
    whether the allocation of any tax imposed under section 1375 is made 
    based on the total gross or total net passive investment income. Under 
    section 1375, the amount of excess passive investment income is 
    allocated to the items of passive investment income based on the net 
    passive investment income of the corporation. The allocation of the tax 
    imposed on the excess passive investment income should be similarly 
    allocated. Accordingly, the final regulations clarify that the 
    allocation of any tax under section 1375 is based on the total net 
    passive investment income for the taxable year.
    
    8. Accrual of Charitable Contribution Deductions Under Section 
    170(a)(2)
    
        The proposed regulations under section 1366 provide that each 
    shareholder must take into account the shareholder's pro rata share of 
    any charitable contributions paid by the corporation during the 
    corporation's taxable year. A commentator requested that the final 
    regulations clarify that separately stated items include charitable 
    contributions paid or deemed to be paid. The commentator suggested that 
    an accrual basis S corporation may elect under section 170(a)(2) to 
    treat charitable contributions as paid in the year prior to the year in 
    which the charitable contribution is actually paid.
        Under section 1363(b), S corporations generally compute their 
    taxable income in the same manner as in the case of an individual. 
    However, S corporations are not permitted to take charitable 
    contribution deductions by virtue of the cross reference in section 
    1363(b)(2) to section 703(a)(2). Instead, the deductions for charitable 
    contributions pass through to the shareholders of the S corporation. 
    Individuals cannot make the election under section 170(a)(2). Treasury 
    and the Service believe that an S corporation also cannot make the 
    election under section 170(a)(2). Accordingly, the final regulations do 
    not adopt this suggestion.
    
    9. Treatment of Section 108 Income
    
        The regulations enumerate items of income (including tax-exempt 
    income), loss, deduction, or credit of an S corporation that must be 
    taken into account separately by each shareholder pursuant to section 
    1366(a)(1)(A). ``Tax-exempt income'' does not include income from 
    discharge of indebtedness excluded from income under section 108 
    because such income is not permanently excludible from income in all 
    circumstances in which section 108 applies. One commentator objected to 
    this treatment of section 108 income, arguing that such income is tax-
    exempt and that application of section 108 at the S corporation level 
    pursuant to section 108(d)(7)(A) does not preclude the pass-through of 
    section 108 income. Another commentator, however, agreed with the 
    approach taken by the regulations.
        Treasury and the Service continue to believe that the absence of a 
    stock basis increase for income of an S corporation excluded under 
    section 108(a) is consistent with the legislative history of section 
    108 and the specific rules that apply to the discharge of indebtedness 
    income of S corporations. Accordingly, the treatment of section 108 
    income is unchanged in the final regulations.
    
    10. Adjustment to Basis of Stock
    
        Section 1367(a) and Sec. 1.1367-1 of the proposed regulations 
    prescribe the order of adjustments required by subchapter S to the 
    basis of a shareholder's stock in an S corporation and the manner in 
    which those adjustments are made.
        A commentator suggested that the final regulations should provide 
    that life insurance premiums on policies owned by the S corporation do 
    not affect either a shareholder's basis in stock/debt or the 
    corporation's accumulated adjustments account (AAA). The commentator 
    further suggested that Sec. 1.1367-1(c)(2) (relating to noncapital, 
    nondeductible expenses) be amended to make special provision for 
    accounts receivable when debt is restored.
        Because these comments relate to provisions in Sec. 1.1367-1 that 
    were not affected by the amendments contained in the proposed 
    regulations, the comments are not reflected in the final regulations.
    
    11. Adjustments Required Before Determining Tax Effect of Distribution
    
        Section 1.1368-2 of the proposed regulations provides rules for 
    determining the source of a distribution made by an S corporation with 
    respect to its stock and the tax effect of the distribution to the 
    shareholders for
    
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    taxable years of the corporation beginning on or after August 18, 1998.
        One commentator interpreted Sec. 1.1368-2(a)(5) of the proposed 
    regulations, which prescribes the order in which adjustments are made 
    to the AAA for purposes of determining the source of a distribution, as 
    providing that the AAA is adjusted in the same order as the adjustments 
    to the basis of a share of stock under Sec. 1.1367-1 of the proposed 
    regulations. The commentator stated that although the Small Business 
    Job Protection Act of 1996 (1996 Act) changed the order of the 
    adjustments to the basis of a share of stock, the 1996 Act did not 
    change the order of the adjustments to the AAA except in situations 
    involving a net negative adjustment (where the reductions in the 
    account for the taxable year exceed the increases for the taxable 
    year). When a net negative adjustment occurs, the AAA is adjusted to 
    take into account distributions before the AAA is adjusted to take into 
    account any net negative adjustment.
        Consistent with the comment received, the final regulations make 
    clear that except in situations involving a net negative adjustment, 
    the order of adjustments to the AAA is not changed. Examples are added 
    to the final regulations to illustrate the effect of the 1996 Act on 
    the AAA ordering rules.
    
    12. Transition Rule and Effective Date Sections 1367 and 1368
    
        Sections 1.1367-3 and 1.1368-4 of the proposed regulations provide 
    that the amendments to the final regulations under section 1367 and 
    1368 apply only to taxable years of the corporation beginning on or 
    after August 18, 1998.
        Commentators suggested that because the amendments to sections 1367 
    and 1368 under the 1996 Act are effective for taxable years beginning 
    after December 31, 1996, the final regulations should be effective, at 
    least on an elective basis, for the period beginning from the effective 
    date of the 1996 Act and ending on the effective date of the final 
    regulations.
        Sections 1.1367-3 and 1.1368-4 of the final regulations reflect 
    this comment and provide that for taxable years beginning on or after 
    January 1, 1997, and before August 18, 1998, the adjustments to the 
    basis of a shareholder's stock and the treatment of distributions by an 
    S corporation, respectively, must be determined in a reasonable manner, 
    taking into account the statute and the legislative history. Return 
    positions consistent with the final regulations will be considered 
    reasonable.
    
    Special Analyses
    
        It has been determined that this Treasury decision is not a 
    significant regulatory action as defined in Executive Order 12866. 
    Therefore, a regulatory assessment is not required. It has also been 
    determined that section 553(b) of the Administrative Procedure Act (5 
    U.S.C. chapter 5) does not apply to these regulations. It is hereby 
    certified that the collection of information in these regulations will 
    not have a significant economic impact on a substantial number of small 
    entities. This certification is based upon the fact that these 
    regulations do not impose a collection of information that is not 
    already required by the underlying statute or the current regulations 
    and reflected in the appropriate forms. Therefore, a Regulatory 
    Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. 
    chapter 6) is not required. Pursuant to section 7805(f) of the Internal 
    Revenue Code, the notice of proposed rulemaking preceding these 
    regulations was submitted to the Chief Counsel for Advocacy of the 
    Small Business Administration for comment on its impact on small 
    business.
        Drafting Information. The principal authors of these final 
    regulations are Terri A. Belanger, Deane M. Burke, and Brenda Stewart 
    of the Office of Chief Counsel (Passthroughs and Special Industries), 
    Internal Revenue Service. However, other personnel from the IRS and 
    Treasury Department participated in their development.
    
    List of Subjects
    
    26 CFR Part 1
    
        Income taxes, Reporting and recordkeeping requirements.
    
    26 CFR Part 602
    
        Reporting and recordkeeping requirements.
    
    Adoption of Amendments to the Regulations
    
        Accordingly, 26 CFR parts 1 and 602 are amended as follows:
    
    PART 1--INCOME TAXES
    
        Paragraph 1. The authority citation for part 1 continues to read in 
    part as follows:
    
        Authority: 26 U.S.C. 7805 * * *
    
        Par. 2. Sections 1.1366-0 and 1.1366-1 are added, Sec. 1.1366-2 is 
    revised, and Secs. 1.1366-3 through 1.1366-5 are added to read as 
    follows:
    
    Sec. 1.1366-0  Table of contents.
    
        The following table of contents is provided to facilitate the use 
    of Secs. 1.1366-1 through 1.1366-5:
    
    Sec. 1.1366-1  Shareholder's share of items of an S corporation.
    
        (a) Determination of shareholder's tax liability.
        (1) In general.
        (2) Separately stated items of income, loss, deduction, or 
    credit.
        (3) Nonseparately computed income or loss.
        (4) Separate activities requirement.
        (5) Aggregation of deductions or exclusions for purposes of 
    limitations.
        (b) Character of items constituting pro rata share.
        (1) In general.
        (2) Exception for contribution of noncapital gain property.
        (3) Exception for contribution of capital loss property.
        (c) Gross income of a shareholder.
        (1) In general.
        (2) Gross income for substantial omission of items.
        (d) Shareholders holding stock subject to community property 
    laws.
        (e) Net operating loss deduction of shareholder of S 
    corporation.
        (f) Cross-reference.
    
    Sec. 1.1366-2  Limitations on deduction of passthrough items of an 
    S corporation to its shareholders.
    
        (a) In general.
        (1) Limitation on losses and deductions.
        (2) Carryover of disallowance.
        (3) Basis limitation amount.
        (i) Stock portion.
        (ii) Indebtedness portion.
        (4) Limitation on losses and deductions allocated to each item.
        (5) Nontransferability of losses and deductions.
        (6) Basis of stock acquired by gift.
        (b) Special rules for carryover of disallowed losses and 
    deductions to post-termination transition period described in 
    section 1377(b).
        (1) In general.
        (2) Limitation on losses and deductions.
        (3) Limitation on losses and deductions allocated to each item.
        (4) Adjustment to the basis of stock.
        (c) Carryover of disallowed losses and deductions in the case of 
    liquidations, reorganizations, and divisions.
        (1) Liquidations and reorganizations.
        (2) Corporate separations to which section 368(a)(1)(D) applies.
    
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    Sec. 1.1366-3  Treatment of family groups.
    
        (a) In general.
        (b) Examples.
    
    Sec. 1.1366-4  Special rules limiting the passthrough of certain 
    items of an S corporation to its shareholders.
    
        (a) Passthrough inapplicable to section 34 credit.
        (b) Reduction in passthrough for tax imposed on built-in gains.
        (c) Reduction in passthrough for tax imposed on excess net 
    passive income.
    
    Sec. 1.1366-5  Effective date.
    
    
    Sec. 1.1366-1  Shareholder's share of items of an S corporation.
    
        (a) Determination of shareholder's tax liability--(1) In general. 
    An S corporation must report, and a shareholder is required to take 
    into account in the shareholder's return, the shareholder's pro rata 
    share, whether or not distributed, of the S corporation's items of 
    income, loss, deduction, or credit described in paragraphs (a)(2), (3), 
    and (4) of this section. A shareholder's pro rata share is determined 
    in accordance with the provisions of section 1377(a) and the 
    regulations thereunder. The shareholder takes these items into account 
    in determining the shareholder's taxable income and tax liability for 
    the shareholder's taxable year with or within which the taxable year of 
    the corporation ends. If the shareholder dies (or if the shareholder is 
    an estate or trust and the estate or trust terminates) before the end 
    of the taxable year of the corporation, the shareholder's pro rata 
    share of these items is taken into account on the shareholder's final 
    return. For the limitation on allowance of a shareholder's pro rata 
    share of S corporation losses or deductions, see section 1366(d) and 
    Sec. 1.1366-2.
        (2) Separately stated items of income, loss, deduction, or credit. 
    Each shareholder must take into account separately the shareholder's 
    pro rata share of any item of income (including tax-exempt income), 
    loss, deduction, or credit of the S corporation that if separately 
    taken into account by any shareholder could affect the shareholder's 
    tax liability for that taxable year differently than if the shareholder 
    did not take the item into account separately. The separately stated 
    items of the S corporation include, but are not limited to, the 
    following items--
        (i) The corporation's combined net amount of gains and losses from 
    sales or exchanges of capital assets grouped by applicable holding 
    periods, by applicable rate of tax under section 1(h), and by any other 
    classification that may be relevant in determining the shareholder's 
    tax liability;
        (ii) The corporation's combined net amount of gains and losses from 
    sales or exchanges of property described in section 1231 (relating to 
    property used in the trade or business and involuntary conversions), 
    grouped by applicable holding periods, by applicable rate of tax under 
    section 1(h), and by any other classification that may be relevant in 
    determining the shareholder's tax liability;
        (iii) Charitable contributions, grouped by the percentage 
    limitations of section 170(b), paid by the corporation within the 
    taxable year of the corporation;
        (iv) The taxes described in section 901 that have been paid (or 
    accrued) by the corporation to foreign countries or to possessions of 
    the United States;
        (v) Each of the corporation's separate items involved in the 
    determination of credits against tax allowable under part IV of 
    subchapter A (section 21 and following) of the Internal Revenue Code, 
    except for any credit allowed under section 34 (relating to certain 
    uses of gasoline and special fuels);
        (vi) Each of the corporation's separate items of gains and losses 
    from wagering transactions (section 165(d)); soil and water 
    conservation expenditures (section 175); deduction under an election to 
    expense certain depreciable business expenses (section 179); medical, 
    dental, etc., expenses (section 213); the additional itemized 
    deductions for individuals provided in part VII of subchapter B 
    (section 212 and following) of the Internal Revenue Code; and any other 
    itemized deductions for which the limitations on itemized deductions 
    under sections 67 or 68 applies;
        (vii) Any of the corporation's items of portfolio income or loss, 
    and expenses related thereto, as defined in the regulations under 
    section 469;
        (viii) The corporation's tax-exempt income. For purposes of 
    subchapter S, tax-exempt income is income that is permanently 
    excludible from gross income in all circumstances in which the 
    applicable provision of the Internal Revenue Code applies. For example, 
    income that is excludible from gross income under section 101 (certain 
    death benefits) or section 103 (interest on state and local bonds) is 
    tax-exempt income, while income that is excludible from gross income 
    under section 108 (income from discharge of indebtedness) or section 
    109 (improvements by lessee on lessor's property) is not tax-exempt 
    income;
        (ix) The corporation's adjustments described in sections 56 and 58, 
    and items of tax preference described in section 57; and
        (x) Any item identified in guidance (including forms and 
    instructions) issued by the Commissioner as an item required to be 
    separately stated under this paragraph (a)(2).
        (3) Nonseparately computed income or loss. Each shareholder must 
    take into account separately the shareholder's pro rata share of the 
    nonseparately computed income or loss of the S corporation. For this 
    purpose, nonseparately computed income or loss means the corporation's 
    gross income less the deductions allowed to the corporation under 
    chapter 1 of the Internal Revenue Code, determined by excluding any 
    item requiring separate computation under paragraph (a)(2) of this 
    section.
        (4) Separate activities requirement. An S corporation must report, 
    and each shareholder must take into account in the shareholder's 
    return, the shareholder's pro rata share of an S corporation's items of 
    income, loss, deduction, or credit described in paragraphs (a)(2) and 
    (3) of this section for each of the corporation's activities as defined 
    in section 469 and the regulations thereunder.
        (5) Aggregation of deductions or exclusions for purposes of 
    limitations--(i) In general. A shareholder aggregates the shareholder's 
    separate deductions or exclusions with the shareholder's pro rata share 
    of the S corporation's separately stated deductions or exclusions in 
    determining the amount of any deduction or exclusion allowable to the 
    shareholder under subtitle A of the Internal Revenue Code as to which a 
    limitation is imposed.
        (ii) Example. The provisions of paragraph (a)(5)(i) of this section 
    are illustrated by the following example:
    
        Example. In 1999, Corporation M, a calendar year S corporation, 
    purchases and places in service section 179 property costing 
    $10,000. Corporation M elects to expense the entire cost of the 
    property. Shareholder A
    
    [[Page 71646]]
    
    owns 50 percent of the stock of Corporation M. Shareholder A's pro 
    rata share of this item after Corporation M applies the section 
    179(b) limitations is $5,000. Because the aggregate amount of 
    Shareholder A's pro rata share and separately acquired section 179 
    expense may not exceed $19,000 (the aggregate maximum cost that may 
    be taken into account under section 179(a) for the applicable 
    taxable year), Shareholder A may elect to expense up to $14,000 of 
    separately acquired section 179 property that is purchased and 
    placed in service in 1999, subject to the limitations of section 
    179(b).
    
        (b) Character of items constituting pro rata share--(1) In general. 
    Except as provided in paragraph (b)(2) or (3) of this section, the 
    character of any item of income, loss, deduction, or credit described 
    in section 1366(a)(1)(A) or (B) and paragraph (a) of this section is 
    determined for the S corporation and retains that character in the 
    hands of the shareholder. For example, if an S corporation has capital 
    gain on the sale or exchange of a capital asset, a shareholder's pro 
    rata share of that gain will also be characterized as a capital gain 
    regardless of whether the shareholder is otherwise a dealer in that 
    type of property. Similarly, if an S corporation engages in an activity 
    that is not for profit (as defined in section 183), a shareholder's pro 
    rata share of the S corporation's deductions will be characterized as 
    not for profit. Also, if an S corporation makes a charitable 
    contribution to an organization qualifying under section 170(b)(1)(A), 
    a shareholder's pro rata share of the S corporation's charitable 
    contribution will be characterized as made to an organization 
    qualifying under section 170(b)(1)(A).
        (2) Exception for contribution of noncapital gain property. If an S 
    corporation is formed or availed of by any shareholder or group of 
    shareholders for a principal purpose of selling or exchanging 
    contributed property that in the hands of the shareholder or 
    shareholders would not have produced capital gain if sold or exchanged 
    by the shareholder or shareholders, then the gain on the sale or 
    exchange of the property recognized by the corporation is not treated 
    as a capital gain.
        (3) Exception for contribution of capital loss property. If an S 
    corporation is formed or availed of by any shareholder or group of 
    shareholders for a principal purpose of selling or exchanging 
    contributed property that in the hands of the shareholder or 
    shareholders would have produced capital loss if sold or exchanged by 
    the shareholder or shareholders, then the loss on the sale or exchange 
    of the property recognized by the corporation is treated as a capital 
    loss to the extent that, immediately before the contribution, the 
    adjusted basis of the property in the hands of the shareholder or 
    shareholders exceeded the fair market value of the property.
        (c) Gross income of a shareholder--(1) In general. Where it is 
    necessary to determine the amount or character of the gross income of a 
    shareholder, the shareholder's gross income includes the shareholder's 
    pro rata share of the gross income of the S corporation. The 
    shareholder's pro rata share of the gross income of the S corporation 
    is the amount of gross income of the corporation used in deriving the 
    shareholder's pro rata share of S corporation taxable income or loss 
    (including items described in section 1366(a)(1)(A) or (B) and 
    paragraph (a) of this section). For example, a shareholder is required 
    to include the shareholder's pro rata share of S corporation gross 
    income in computing the shareholder's gross income for the purposes of 
    determining the necessity of filing a return (section 6012(a)) and the 
    shareholder's gross income derived from farming (sections 175 and 
    6654(i)).
        (2) Gross income for substantial omission of items--(i) In general. 
    For purposes of determining the applicability of the 6-year period of 
    limitation on assessment and collection provided in section 6501(e) 
    (relating to omission of more than 25 percent of gross income), a 
    shareholder's gross income includes the shareholder's pro rata share of 
    S corporation gross income (as described in section 6501(e)(1)(A)(i)). 
    In this respect, the amount of S corporation gross income used in 
    deriving the shareholder's pro rata share of any item of S corporation 
    income, loss, deduction, or credit (as included or disclosed in the 
    shareholder's return) is considered as an amount of gross income stated 
    in the shareholder's return for purposes of section 6501(e).
        (ii) Example. The following example illustrates the provisions of 
    paragraph (c)(2)(i) of this section:
    
        Example. Shareholder A, an individual, owns 25 percent of the 
    stock of Corporation N, an S corporation that has $10,000 gross 
    income and $2,000 taxable income. A reports only $300 as A's pro 
    rata share of N's taxable income. A should have reported $500 as A's 
    pro rata share of taxable income, derived from A's pro rata share, 
    $2,500, of N's gross income. Because A's return included only $300 
    without a disclosure meeting the requirements of section 
    6501(e)(1)(A)(ii) describing the difference of $200, A is regarded 
    as having reported on the return only $1,500 ($300/$500 of $2,500) 
    as gross income from N.
    
        (d) Shareholders holding stock subject to community property laws. 
    If a shareholder holds S corporation stock that is community property, 
    then the shareholder's pro rata share of any item or items listed in 
    paragraphs (a)(2), (3), and (4) of this section with respect to that 
    stock is reported by the husband and wife in accordance with community 
    property rules.
        (e) Net operating loss deduction of shareholder of S corporation. 
    For purposes of determining a net operating loss deduction under 
    section 172, a shareholder of an S corporation must take into account 
    the shareholder's pro rata share of items of income, loss, deduction, 
    or credit of the corporation. See section 1366(b) and paragraph (b) of 
    this section for rules on determining the character of the items. In 
    determining under section 172(d)(4) the nonbusiness deductions 
    allowable to a shareholder of an S corporation (arising from both 
    corporation sources and any other sources), the shareholder separately 
    takes into account the shareholder's pro rata share of the deductions 
    of the corporation that are not attributable to a trade or business and 
    combines this amount with the shareholder's nonbusiness deductions from 
    any other sources. The shareholder also separately takes into account 
    the shareholder's pro rata share of the gross income of the corporation 
    not derived from a trade or business and combines this amount with the 
    shareholder's nonbusiness income from all other sources. See section 
    172 and the regulations thereunder.
        (f) Cross-reference. For rules relating to the consistent tax 
    treatment of subchapter S items, see section 6037(c).
    
    
    Sec. 1.1366-2  Limitations on deduction of passthrough items of an S 
    corporation to its shareholders.
    
        (a) In general--(1) Limitation on losses and deductions. The 
    aggregate amount of losses and deductions taken into account by a 
    shareholder under Sec. 1.1366-1(a) (2), (3), and (4) for any taxable 
    year of an S corporation cannot exceed the sum of--
        (i) The adjusted basis of the shareholder's stock in the 
    corporation (as determined under paragraph (a)(3)(i) of this section); 
    and
        (ii) The adjusted basis of any indebtedness of the corporation to 
    the shareholder (as determined under paragraph (a)(3)(ii) of this 
    section).
        (2) Carryover of disallowance. A shareholder's aggregate amount of 
    losses and deductions for a taxable year in excess of the sum of the 
    adjusted basis of the shareholder's stock in an S corporation and of 
    any indebtedness of
    
    [[Page 71647]]
    
    the S corporation to the shareholder is not allowed for the taxable 
    year. However, any disallowed loss or deduction retains its character 
    and is treated as incurred by the corporation in the corporation's 
    first succeeding taxable year, and subsequent taxable years, with 
    respect to the shareholder. For rules on determining the adjusted bases 
    of stock of an S corporation and indebtedness of the corporation to the 
    shareholder, see paragraphs (a)(3) (i) and (ii) of this section.
        (3) Basis limitation amount--(i) Stock portion. A shareholder 
    generally determines the adjusted basis of stock for purposes of 
    paragraphs (a)(1)(i) and (2) of this section (limiting losses and 
    deductions) by taking into account only increases in basis under 
    section 1367(a)(1) for the taxable year and decreases in basis under 
    section 1367(a)(2) (A), (D) and (E) (relating to distributions, 
    noncapital, nondeductible expenses, and certain oil and gas depletion 
    deductions) for the taxable year. In so determining this loss 
    limitation amount, the shareholder disregards decreases in basis under 
    section 1367(a)(2) (B) and (C) (for losses and deductions, including 
    losses and deductions previously disallowed) for the taxable year. 
    However, if the shareholder has in effect for the taxable year an 
    election under Sec. 1.1367-1(g) to decrease basis by items of loss and 
    deduction prior to decreasing basis by noncapital, nondeductible 
    expenses and certain oil and gas depletion deductions, the shareholder 
    also disregards decreases in basis under section 1367(a)(2) (D) and 
    (E). This basis limitation amount for stock is determined at the time 
    prescribed under Sec. 1.1367-1(d)(1) for adjustments to the basis of 
    stock.
        (ii) Indebtedness portion. A shareholder determines the 
    shareholder's adjusted basis in indebtedness of the corporation for 
    purposes of paragraphs (a)(1)(ii) and (2) of this section (limiting 
    losses and deductions) without regard to any adjustment under section 
    1367(b)(2)(A) for the taxable year. This basis limitation amount for 
    indebtedness is determined at the time prescribed under Sec. 1.1367-
    2(d)(1) for adjustments to the basis of indebtedness.
        (4) Limitation on losses and deductions allocated to each item. If 
    a shareholder's pro rata share of the aggregate amount of losses and 
    deductions specified in Sec. 1.1366-1(a)(2), (3), and (4) exceeds the 
    sum of the adjusted basis of the shareholder's stock in the corporation 
    (determined in accordance with paragraph (a)(3)(i) of this section) and 
    the adjusted basis of any indebtedness of the corporation to the 
    shareholder (determined in accordance with paragraph (a)(3)(ii) of this 
    section), then the limitation on losses and deductions under section 
    1366(d)(1) must be allocated among the shareholder's pro rata share of 
    each loss or deduction. The amount of the limitation allocated to any 
    loss or deduction is an amount that bears the same ratio to the amount 
    of the limitation as the loss or deduction bears to the total of the 
    losses and deductions. For this purpose, the total of losses and 
    deductions for the taxable year is the sum of the shareholder's pro 
    rata share of losses and deductions for the taxable year, and the 
    losses and deductions disallowed and carried forward from prior years 
    pursuant to section 1366(d)(2).
        (5) Nontransferability of losses and deductions. Any loss or 
    deduction disallowed under paragraph (a)(1) of this section is personal 
    to the shareholder and cannot in any manner be transferred to another 
    person. If a shareholder transfers some but not all of the 
    shareholder's stock in the corporation, the amount of any disallowed 
    loss or deduction under this section is not reduced and the transferee 
    does not acquire any portion of the disallowed loss or deduction. If a 
    shareholder transfers all of the shareholder's stock in the 
    corporation, any disallowed loss or deduction is permanently 
    disallowed.
        (6) Basis of stock acquired by gift. For purposes of section 
    1366(d)(1)(A) and paragraphs (a)(1)(i) and (2) of this section, the 
    basis of stock in a corporation acquired by gift is the basis of the 
    stock that is used for purposes of determining loss under section 
    1015(a).
        (b) Special rules for carryover of disallowed losses and deductions 
    to post-termination transition period described in section 1377(b)--(1) 
    In general. If, for the last taxable year of a corporation for which it 
    was an S corporation, a loss or deduction was disallowed to a 
    shareholder by reason of the limitation in paragraph (a) of this 
    section, the loss or deduction is treated under section 1366(d)(3) as 
    incurred by that shareholder on the last day of any post-termination 
    transition period (within the meaning of section 1377(b)).
        (2) Limitation on losses and deductions. The aggregate amount of 
    losses and deductions taken into account by a shareholder under 
    paragraph (b)(1) of this section cannot exceed the adjusted basis of 
    the shareholder's stock in the corporation determined at the close of 
    the last day of the post-termination transition period. For this 
    purpose, the adjusted basis of a shareholder's stock in the corporation 
    is determined at the close of the last day of the post-termination 
    transition period without regard to any reduction required under 
    paragraph (b)(4) of this section. If a shareholder disposes of a share 
    of stock prior to the close of the last day of the post-termination 
    transition period, the adjusted basis of that share is its basis as of 
    the close of the day of disposition. Any losses and deductions in 
    excess of a shareholder's adjusted stock basis are permanently 
    disallowed. For purposes of section 1366(d)(3)(B) and this paragraph 
    (b)(2), the basis of stock in a corporation acquired by gift is the 
    basis of the stock that is used for purposes of determining loss under 
    section 1015(a).
        (3) Limitation on losses and deductions allocated to each item. If 
    the aggregate amount of losses and deductions treated as incurred by 
    the shareholder under paragraph (b)(1) of this section exceeds the 
    adjusted basis of the shareholder's stock determined under paragraph 
    (b)(2) of this section, the limitation on losses and deductions under 
    section 1366(d)(3)(B) must be allocated among each loss or deduction. 
    The amount of the limitation allocated to each loss or deduction is an 
    amount that bears the same ratio to the amount of the limitation as the 
    amount of each loss or deduction bears to the total of all the losses 
    and deductions.
        (4) Adjustment to the basis of stock. The shareholder's basis in 
    the stock of the corporation is reduced by the amount allowed as a 
    deduction by reason of this paragraph (b). For rules regarding 
    adjustments to the basis of a shareholder's stock in an S corporation, 
    see Sec. 1.1367-1.
        (c) Carryover of disallowed losses and deductions in the case of 
    liquidations, reorganizations, and divisions--(1) Liquidations and 
    reorganizations. If a corporation acquires the assets of an S 
    corporation in a transaction to which section 381(a) applies, any loss 
    or deduction disallowed under paragraph (a) of this section with 
    respect to a shareholder of the distributor or transferor S corporation 
    is available to that shareholder as a shareholder of the acquiring 
    corporation. Thus, where the acquiring corporation is an S corporation, 
    a loss or deduction of a shareholder of the distributor or transferor S 
    corporation disallowed prior to or during the taxable year of the 
    transaction is treated as incurred by the acquiring S corporation with 
    respect to that shareholder if the shareholder is a shareholder of the 
    acquiring S corporation after the transaction. Where the acquiring 
    corporation is a C corporation, a post-termination
    
    [[Page 71648]]
    
    transition period arises the day after the last day that an S 
    corporation was in existence and the rules provided in paragraph (b) of 
    this section apply with respect to any shareholder of the acquired S 
    corporation that is also a shareholder of the acquiring C corporation 
    after the transaction. See the special rules under section 1377 for the 
    availability of the post-termination transition period if the acquiring 
    corporation is a C corporation.
        (2) Corporate separations to which section 368(a)(1)(D) applies. If 
    an S corporation transfers a portion of its assets constituting an 
    active trade or business to another corporation in a transaction to 
    which section 368(a)(1)(D) applies, and immediately thereafter the 
    stock and securities of the controlled corporation are distributed in a 
    distribution or exchange to which section 355 (or so much of section 
    356 as relates to section 355) applies, any loss or deduction 
    disallowed under paragraph (a) of this section with respect to a 
    shareholder of the distributing S corporation immediately before the 
    transaction is allocated between the distributing corporation and the 
    controlled corporation with respect to the shareholder. Such allocation 
    shall be made according to any reasonable method, including a method 
    based on the relative fair market value of the shareholder's stock in 
    the distributing and controlled corporations immediately after the 
    distribution, a method based on the relative adjusted basis of the 
    assets in the distributing and controlled corporations immediately 
    after the distribution, or, in the case of losses and deductions 
    clearly attributable to either the distributing or controlled 
    corporation, any method that allocates such losses and deductions 
    accordingly.
    
    
    Sec. 1.1366-3  Treatment of family groups.
    
        (a) In general. Under section 1366(e), if an individual, who is a 
    member of the family of one or more shareholders of an S corporation, 
    renders services for, or furnishes capital to, the corporation without 
    receiving reasonable compensation, the Commissioner shall prescribe 
    adjustments to those items taken into account by the individual and the 
    shareholders as may be necessary to reflect the value of the services 
    rendered or capital furnished. For these purposes, in determining the 
    reasonable value for services rendered, or capital furnished, to the 
    corporation, consideration will be given to all the facts and 
    circumstances, including the amount that ordinarily would be paid in 
    order to obtain comparable services or capital from a person (other 
    than a member of the family) who is not a shareholder in the 
    corporation. In addition, for purposes of section 1366(e), if a member 
    of the family of one or more shareholders of the S corporation holds an 
    interest in a passthrough entity (e.g., a partnership, S corporation, 
    trust, or estate), that performs services for, or furnishes capital to, 
    the S corporation without receiving reasonable compensation, the 
    Commissioner shall prescribe adjustments to the passthrough entity and 
    the corporation as may be necessary to reflect the value of the 
    services rendered or capital furnished. For purposes of section 
    1366(e), the term family of any shareholder includes only the 
    shareholder's spouse, ancestors, lineal descendants, and any trust for 
    the primary benefit of any of these persons.
        (b) Examples. The provisions of this section may be illustrated by 
    the following examples:
    
        Example 1. The stock of an S corporation is owned 50 percent by 
    F and 50 percent by T, the minor son of F. For the taxable year, the 
    corporation has items of taxable income equal to $70,000. 
    Compensation of $10,000 is paid by the corporation to F for services 
    rendered during the taxable year, and no compensation is paid to T, 
    who rendered no services. Based on all the relevant facts and 
    circumstances, reasonable compensation for the services rendered by 
    F would be $30,000. In the discretion of the Internal Revenue 
    Service, up to an additional $20,000 of the $70,000 of the 
    corporation's taxable income, for tax purposes, may be allocated to 
    F as compensation for services rendered. If the Internal Revenue 
    Service allocates $20,000 of the corporation's taxable income to F 
    as compensation for services, taxable income of the corporation 
    would be reduced by $20,000 to $50,000, of which F and T each would 
    be allocated $25,000. F would have $30,000 of total compensation 
    paid by the corporation for services rendered.
        Example 2. The stock of an S corporation is owned by A and B. 
    For the taxable year, the corporation has paid compensation to a 
    partnership that rendered services to the corporation during the 
    taxable year. The spouse of A is a partner in that partnership. 
    Consequently, if based on all the relevant facts and circumstances 
    the partnership did not receive reasonable compensation for the 
    services rendered to the corporation, the Internal Revenue Service, 
    in its discretion, may make adjustments to those items taken into 
    account by the partnership and the corporation as may be necessary 
    to reflect the value of the services rendered.
    
    
    Sec. 1.1366-4  Special rules limiting the passthrough of certain items 
    of an S corporation to its shareholders.
    
        (a) Passthrough inapplicable to section 34 credit. Section 1.1366-
    1(a) does not apply to any credit allowable under section 34 (relating 
    to certain uses of gasoline and special fuels).
        (b) Reduction in passthrough for tax imposed on built-in gains. For 
    purposes of Sec. 1.1366-1(a), if for any taxable year of the S 
    corporation a tax is imposed on the corporation under section 1374, the 
    amount of the tax imposed is treated as a loss sustained by the S 
    corporation during the taxable year. The character of the deemed loss 
    is determined by allocating the loss proportionately among the net 
    recognized built-in gains giving rise to the tax and attributing the 
    character of each net recognized built-in gain to the allocable portion 
    of the loss.
        (c) Reduction in passthrough for tax imposed on excess net passive 
    income. For purposes of Sec. 1.1366-1(a), if for any taxable year of 
    the S corporation a tax is imposed on the corporation under section 
    1375, each item of passive investment income shall be reduced by an 
    amount that bears the same ratio to the amount of the tax as the amount 
    of the item bears to the total net passive investment income for that 
    taxable year.
    
    
    Sec. 1.1366-5  Effective date.
    
        Sections 1.1366-1 through 1.1366-4 apply to taxable years of an S 
    corporation beginning on or after August 18, 1998.
        Par. 3. Section 1.1367-0 is amended in the table as follows:
        1. The entries for Sec. 1.1367-1 (e) through (g) are revised.
        2. The entries for Sec. 1.1367-1 (h) through (j) are added.
        The additions and revisions read as follows:
    
    Sec. 1.1367-0  Table of contents.
    * * * * *
    Sec. 1.1367-1  Adjustments to basis of shareholder's stock in an S 
    corporation.
    * * * * *
        (e) Ordering rules for taxable years beginning before January 1, 
    1997.
        (f) Ordering rules for taxable years beginning on or after 
    August 18, 1998.
        (g) Elective ordering rule.
        (h) Examples.
        (i) [Reserved]
        (j) Adjustments for items of income in respect of a decedent.
    * * * * *
        Par. 4. Section 1.1367-1 is amended as follows:
        1. The paragraph heading and introductory text of paragraph (e) are 
    revised.
        2. Paragraphs (f) and (g) are redesignated as paragraphs (g) and 
    (h), respectively.
        3. New paragraph (f) is added.
        4. The first and second sentences of newly designated paragraph (g) 
    are revised.
        5. Newly designated paragraph (h) is amended as follows:
        a. The heading for Example 1 is revised.
    
    [[Page 71649]]
    
        b. Example 2 and Example 3 are redesignated as Example 3 and 
    Example 4, respectively.
        c. New Example 2 is added.
        d. The heading of newly designated Example 4 is revised.
        e. Example 5 is added.
        6. Paragraph (i) is added and reserved and paragraph (j) is added.
        The additions and revisions read as follows:
    
    
    Sec. 1.1367-1  Adjustments to basis of shareholder's stock in an S 
    corporation.
    
    * * * * *
        (e) Ordering rules for taxable years beginning before January 1, 
    1997. For any taxable year of a corporation beginning before January 1, 
    1997, except as provided in paragraph (g) of this section, the 
    adjustments required by section 1367(a) are made in the following 
    order--
    * * * * *
        (f) Ordering rules for taxable years beginning on or after August 
    18, 1998. For any taxable year of a corporation beginning on or after 
    August 18, 1998, except as provided in paragraph (g) of this section, 
    the adjustments required by section 1367(a) are made in the following 
    order--
        (1) Any increase in basis attributable to the income items 
    described in section 1367(a)(1)(A) and (B), and the excess of the 
    deductions for depletion described in section 1367(a)(1)(C);
        (2) Any decrease in basis attributable to a distribution by the 
    corporation described in section 1367(a)(2)(A);
        (3) Any decrease in basis attributable to noncapital, nondeductible 
    expenses described in section 1367(a)(2)(D), and the oil and gas 
    depletion deduction described in section 1367(a)(2)(E); and
        (4) Any decrease in basis attributable to items of loss or 
    deduction described in section 1367(a)(2)(B) and (C).
        (g) Elective ordering rule. A shareholder may elect to decrease 
    basis under paragraph (e)(3) or (f)(4) of this section, whichever 
    applies, prior to decreasing basis under paragraph (e)(2) or (f)(3) of 
    this section, whichever applies. If a shareholder makes this election, 
    any amount described in paragraph (e)(2) or (f)(3) of this section, 
    whichever applies, that is in excess of the shareholder's basis in 
    stock and indebtedness is treated, solely for purposes of this section, 
    as an amount described in paragraph (e)(2) or (f)(3) of this section, 
    whichever applies, in the succeeding taxable year. * * *
        (h) * * *
    
        Example 1. Adjustments to basis of stock for taxable years 
    beginning before January 1, 1997. * * *
        Example 2. Adjustments to basis of stock for taxable years 
    beginning on or after August 18, 1998. (i) On December 31, 2001, A 
    owns a block of 50 shares of stock with an adjusted basis per share 
    of $6 in Corporation S. On December 31, 2001, A purchases for $400 
    an additional block of 50 shares of stock with an adjusted basis of 
    $8 per share. Thus, A holds 100 shares of stock for each day of the 
    2002 taxable year. For S's 2002 taxable year, A's pro rata share of 
    the amount of items described in section 1367(a)(1)(A) (relating to 
    increases in basis of stock) is $300, A's pro rata share of the 
    amount of the items described in section 1367(a)(2)(B) (relating to 
    decreases in basis of stock attributable to items of loss and 
    deduction) is $300, and A's pro rata share of the amount of the 
    items described in section 1367(a)(2)(D) (relating to decreases in 
    basis of stock attributable to noncapital, nondeductible expenses) 
    is $200. S makes a distribution to A in the amount of $100 during 
    2002.
        (ii) Pursuant to the ordering rules of paragraph (f) of this 
    section, A first increases the basis of each share of stock by $3 
    ($300/100 shares) and then decreases the basis of each share by $1 
    ($100/100 shares) for the distribution. A next decreases the basis 
    of each share by $2 ($200/100 shares) for the noncapital, 
    nondeductible expenses and then decreases the basis of each share by 
    $3 ($300/100 shares) for the items of loss. Thus, on January 1, 
    2003, A has a basis of $3 per share in the original block of 50 
    shares ($6 + $3 - $1 - $2 - $3) and a basis of $5 per share in the 
    second block of 100 shares ($8 + $3 - $1 - $2 - $3).
    * * * * *
        Example 4. Effects of section 1377(a)(2) election and 
    distribution on basis of stock for taxable years beginning before 
    January 1, 1997. * * *
        Example 5. Effects of section 1377(a)(2) election and 
    distribution on basis of stock for taxable years beginning on or 
    after August 18, 1998. (i) The facts are the same as in Example 4, 
    except that all of the events occur in 2001 rather than in 1994 and 
    except as follows: On June 30, 2001, B sells 25 shares of her stock 
    for $5,000 to D and 25 shares back to Corporation S for $5,000. 
    Under section 1377(a)(2)(B) and Sec. 1.1377-1(b)(2), B and C are 
    affected shareholders because B has transferred shares to 
    Corporation S. Pursuant to section 1377(a)(2)(A) and Sec. 1.1377-
    1(b)(1), B and C, the affected shareholders, and Corporation S agree 
    to treat the taxable year 2001 as if it consisted of two separate 
    taxable years for all affected shareholders for the purposes set 
    forth in Sec. 1.1377-1(b)(3)(i).
        (ii) On June 30, 2001, B and C, pursuant to the ordering rules 
    of paragraph (f)(1) of this section, increase the basis of each 
    share by $60 ($6,000/100 shares) for the nonseparately computed 
    income. Then B and C reduce the basis of each share by $120 
    ($12,000/100 shares) for the distribution. Finally, B and C decrease 
    the basis of each share by $40 ($4,000/100 shares) for the 
    separately stated deduction item.
        (iii) The basis of the stock of B is reduced from $120 to $20 
    per share ($120 + $60 - $120 - $40). Prior to accounting for the 
    separately stated deduction item, the basis of the stock of C is 
    reduced from $80 to $20 ($80 + $60 - $120). Finally, because the 
    period from January 1 through June 30, 2001 is treated under 
    Sec. 1.1377-1(b)(3)(i) as a separate taxable year for purposes of 
    making adjustments to the basis of stock, under section 1366(d) and 
    Sec. 1.1366-2(a)(2), C may deduct only $20 per share of the 
    remaining $40 of the separately stated deduction item, and the basis 
    of the stock of C is reduced from $20 per share to $0 per share. 
    Under section 1366 and Sec. 1.1366-2(a)(2), C's remaining separately 
    stated deduction item of $20 per share is treated as having been 
    incurred in the first succeeding taxable year of Corporation S, 
    which, for this purpose, begins on July 1, 2001.
    
        (i) [Reserved]
        (j) Adjustments for items of income in respect of a decedent. The 
    basis determined under section 1014 of any stock in an S corporation is 
    reduced by the portion of the value of the stock that is attributable 
    to items constituting income in respect of a decedent. For the 
    determination of items realized by an S corporation constituting income 
    in respect of a decedent, see sections 1367(b)(4)(A) and 691 and 
    applicable regulations thereunder. For the determination of the 
    allowance of a deduction for the amount of estate tax attributable to 
    income in respect of a decedent, see section 691(c) and applicable 
    regulations thereunder.
        Par. 5. Sec. 1.1367-3 is revised to read as follows:
    
    
    Sec. 1.1367-3  Effective date and transition rule.
    
        Except for Sec. 1.1367-1(f), (h) Example 2 and Example 5, and (j), 
    Secs. 1.1367-1 and 1.1367-2 apply to taxable years of the corporation 
    beginning on or after January 1, 1994. Section 1.1367-1(f), (h) Example 
    2 and Example 5, and (j) apply only to taxable years of the corporation 
    beginning on or after August 18, 1998. For taxable years beginning 
    before January 1, 1994, and taxable years beginning on or after January 
    1, 1997, and before August 18, 1998, the basis of a shareholder's stock 
    must be determined in a reasonable manner, taking into account the 
    statute and legislative history. Except for Sec. 1.1367-1(f), (h) 
    Example 2 and Example 5, and (j), return positions consistent with 
    Secs. 1.1367-1 and 1.1367-2 are reasonable for taxable years beginning 
    before January 1, 1994. Return positions consistent with Sec. 1.1367-
    1(f), (h) Example 2 and Example 5, and (j) are reasonable for taxable 
    years beginning on or after January 1, 1997, and before August 18, 
    1998.
        Par. 6. Section 1.1368-0 is amended in the table as follows:
        1. The entry for Sec. 1.1368-1(e) is revised and entries for 
    Sec. 1.1368-1(e)(1) and (2) are added.
    
    [[Page 71650]]
    
        2. The entry for Sec. 1.1368-2(a)(4) is revised.
        3. An entry for Sec. 1.1368-2(a)(5) is added.
        4. The entry for Sec. 1.1368-2(d) is revised.
        The additions and revisions read as follows:
    
    
    Sec. 1.1368-0  Table of contents.
    
    * * * * *
    Sec. 1.1368-1  Distributions by S corporations.
    * * * * *
        (e) Certain adjustments taken into account.
        (1) Taxable years beginning before January 1, 1997.
        (2) Taxable years beginning on or after August 18, 1998.
    * * * * *
    Sec. 1.1368-2 Accumulated adjustments account (AAA).
        (a) * * *
        (4) Ordering rules for the AAA for taxable years beginning 
    before January 1, 1997.
        (5) Ordering rules for the AAA for taxable years beginning on or 
    after August 18, 1998.
    * * * * *
        (d) Adjustment in the case of redemptions, liquidations, 
    reorganizations, and divisions.
    * * * * *
        Par. 7. Section 1.1368-1 is amended by revising paragraphs (d)(1) 
    and (e) to read as follows:
    
    
    Sec. 1.1368-1  Distributions by S corporations.
    
    * * * * *
        (d) S corporation with earnings and profits--(1) General treatment 
    of distribution. Except as provided in paragraph (d)(2) of this 
    section, a distribution made with respect to its stock by an S 
    corporation that has accumulated earnings and profits as of the end of 
    the taxable year of the S corporation in which the distribution is made 
    is treated in the manner provided in section 1368(c). See section 316 
    and Sec. 1.316-2 for provisions relating to the allocation of earnings 
    and profits among distributions.
    * * * * *
        (e) Certain adjustments taken into account--(1) Taxable years 
    beginning before January 1, 1997. For any taxable year of the 
    corporation beginning before January 1, 1997, paragraphs (c) and (d) of 
    this section are applied only after taking into account--
        (i) The adjustments to the basis of the shares of a shareholder's 
    stock described in section 1367 (without regard to section 
    1367(a)(2)(A) (relating to decreases attributable to distributions not 
    includible in income)) for the S corporation's taxable year; and
        (ii) The adjustments to the AAA required by section 1368(e)(1)(A) 
    (but without regard to the adjustments for distributions under 
    Sec. 1.1368-2(a)(3)(iii)) for the S corporation's taxable year.
        (2) Taxable years beginning on or after August 18, 1998. For any 
    taxable year of the corporation beginning on or after August 18, 1998, 
    paragraphs (c) and (d) of this section are applied only after taking 
    into account--
        (i) The adjustments to the basis of the shares of a shareholder's 
    stock described in section 1367(a)(1) (relating to increases in basis 
    of stock) for the S corporation's taxable year; and
        (ii) The adjustments to the AAA required by section 1368(e)(1)(A) 
    (but without regard to the adjustments for distributions under 
    Sec. 1.1368-2(a)(3)(iii)) for the S corporation's taxable year. Any net 
    negative adjustment (as defined in section 1368(e)(1)(C)(ii)) for the 
    taxable year shall not be taken into account.
    * * * * *
        Par. 8. Section 1.1368-2 is amended as follows:
        1. Paragraphs (a)(1) and (a)(3)(ii), and the paragraph heading and 
    introductory text of paragraph (a)(4) are revised.
        2. Paragraph (a)(5) is added.
        3. The paragraph heading for paragraph (d) is revised.
        The additions and revisions read as follows:
    
    
    Sec. 1.1368-2  Accumulated adjustments account (AAA).
    
        (a) Accumulated adjustments account--(1) In general. The 
    accumulated adjustments account is an account of the S corporation and 
    is not apportioned among shareholders. The AAA is relevant for all 
    taxable years beginning on or after January 1, 1983, for which the 
    corporation is an S corporation. On the first day of the first year for 
    which the corporation is an S corporation, the balance of the AAA is 
    zero. The AAA is increased in the manner provided in paragraph (a)(2) 
    of this section and is decreased in the manner provided in paragraph 
    (a)(3) of this section. For the adjustments to the AAA in the case of 
    redemptions, liquidations, reorganizations, and corporate separations, 
    see paragraph (d) of this section.
    * * * * *
        (3) * * *
        (ii) Extent of allowable reduction. The AAA may be decreased under 
    paragraph (a)(3)(i) of this section below zero. The AAA is decreased by 
    noncapital, nondeductible expenses under paragraph (a)(3)(i)(C) of this 
    section even though a portion of the noncapital, nondeductible expenses 
    is not taken into account by a shareholder under Sec. 1.1367-1(g) 
    (relating to the elective ordering rule). The AAA is also decreased by 
    the entire amount of any loss or deduction even though a portion of the 
    loss or deduction is not taken into account by a shareholder under 
    section 1366(d)(1) or is otherwise not currently deductible under the 
    Internal Revenue Code. However, in any subsequent taxable year in which 
    the loss, deduction, or noncapital, nondeductible expense is treated as 
    incurred by the corporation with respect to the shareholder under 
    section 1366(d)(2) or Sec. 1.1367-1(g) (or in which the loss or 
    deduction is otherwise allowed to the shareholder), no further 
    adjustment is made to the AAA.
    * * * * *
        (4) Ordering rules for the AAA for taxable years beginning before 
    January 1, 1997. For any taxable year beginning before January 1, 1997, 
    the adjustments to the AAA are made in the following order--
    * * * * *
        (5) Ordering rules for the AAA for taxable years beginning on or 
    after August 18, 1998. For any taxable year of the S corporation 
    beginning on or after August 18, 1998, the adjustments to the AAA are 
    made in the following order--
        (i) The AAA is increased under paragraph (a)(2) of this section 
    before it is decreased under paragraph (a)(3)(i) of this section for 
    the taxable year;
        (ii) The AAA is decreased under paragraph (a)(3)(i) of this section 
    (without taking into account any net negative adjustment (as defined in 
    section 1368(e)(1)(C)(ii)) before it is decreased under paragraph 
    (a)(3)(iii) of this section;
        (iii) The AAA is decreased (but not below zero) by any portion of 
    an ordinary distribution to which section 1368(b) or (c)(1) applies;
        (iv) The AAA is decreased by any net negative adjustment (as 
    defined in section 1368(e)(1)(C)(ii)); and
        (v) The AAA is adjusted (whether negative or positive) for 
    redemption distributions under paragraph (d)(1) of this section.
    * * * * *
        (d) Adjustment in the case of redemptions, liquidations, 
    reorganizations, and divisions * * *
    * * * * *
        Par. 9. Section 1368-3 is amended as follows:
        1. The heading for Example 1 is revised.
        2. Example 3 through Example 6 are redesignated as Example 6 
    through Example 9, respectively.
        3. Example 2 is redesignated as Example 3.
    
    [[Page 71651]]
    
        4. The heading for newly redesignated Example 3 is revised.
        5. New Example 2, Example 4, and Example 5 are added.
        The revisions and additions read as follows:
    
    
    Sec. 1.1368-3  Examples.
    
    * * * * *
        Example 1. Distributions by S corporations without C corporation 
    earnings and profits for taxable years beginning before January 1, 
    1997. * * *
        Example 2. Distributions by S corporations without earnings and 
    profits for taxable years beginning on or after August 18, 1998. (i) 
    Corporation S, an S corporation, has no earnings and profits as of 
    January 1, 2001, the first day of its 2001 taxable year. S's sole 
    shareholder, A, holds 10 shares of S stock with a basis of $1 per 
    share as of that date. On March 1, 2001, S makes a distribution of 
    $38 to A. The balance in Corporation S's AAA is $100. For S's 2001 
    taxable year, A's pro rata share of the amount of the items 
    described in section 1367(a)(1) (relating to increases in basis of 
    stock) is $50. A's pro rata share of the amount of the items 
    described in sections 1367(a)(2)(B) through (D) (relating to 
    decreases in basis of stock for items other than distributions) is 
    $26, $20 of which is attributable to items described in section 
    1367(a)(2)(B) and (C) and $6 of which is attributable to items 
    described in section 1367(a)(2)(D) (relating to decreases in basis 
    attributable to noncapital, nondeductible expenses).
        (ii) Under section 1368(d)(1) and Sec. 1.1368-1(e)(1) and (2), 
    the adjustments to the basis of A's stock in S described in sections 
    1367(a)(1) are made before the distribution rules of section 1368 
    are applied. Thus, A's basis per share in the stock is $6.00 ($1 + 
    [$50/10]) before taking into account the distribution. Under section 
    1367(a)(2)(A), the basis of A's stock is decreased by distributions 
    to A that are not includible in A's income. Under Sec. 1.1367-
    1(c)(3), the amount of the distribution that is attributable to each 
    share of A's stock is $3.80 ($38 distribution/10 shares). Thus, A's 
    basis per share in the stock is $2.20 ($6.00-$3.80), after taking 
    into account the distribution. Under section 1367(a)(2)(D), the 
    basis of each share of A's stock in S after taking into account the 
    distribution, $2.20, is decreased by $.60 ($6 noncapital, 
    nondeductible expenses/10). Thus, A's basis per share after taking 
    into account the nondeductible, noncapital expenses is $1.60. Under 
    section 1367(a)(2)(B) and (C), A's basis per share is further 
    decreased by $2 ($20 items described in section 1367(a)(2)(B) and 
    (C)/10 shares). However, basis may not be reduced below zero. 
    Therefore, the basis of each share of A's stock is reduced to zero. 
    As of January 1, 2002, A has a basis of $0 in his shares of S stock. 
    Pursuant to section 1366(d)(2), the $.40 of loss in excess of A's 
    basis in each of his shares of S stock is treated as incurred by the 
    corporation in the succeeding taxable year with respect to A.
        Example 3. Distributions by S corporations with C corporation 
    earnings and profits for taxable years beginning before January 1, 
    1997. * * *
        Example 4. Distributions by S corporations with earnings and 
    profits and no net negative adjustment for taxable years beginning 
    on or after August 18, 1998. (i) Corporation S, an S corporation, 
    has accumulated earnings and profits of $1,000 and a balance in the 
    AAA of $2,000 on January 1, 2001. S's sole shareholder B holds 100 
    shares of stock with a basis of $20 per share as of January 1, 2001. 
    On April 1, 2001, S makes a distribution of $1,500 to B. B's pro 
    rata share of the income earned by S during 2001 is $2,000 and B's 
    pro rata share of S's losses is $1,500. For the taxable year ending 
    December 31, 2001, S does not have a net negative adjustment as 
    defined in section 1368(e)(1)(C). S does not make the election under 
    section 1368(e)(3) and Sec. 1.1368-1(f)(2) to distribute its 
    earnings and profits before its AAA.
        (ii) The AAA is increased from $2,000 to $4,000 for the $2,000 
    of income earned during the 2001 taxable year. The AAA is decreased 
    from $4,000 to $2,500 for the $1,500 of losses. The AAA is decreased 
    from $2,500 to $1,000 for the portion of the distribution ($1,500) 
    to B that does not exceed the AAA.
        (iii) As of December 31, 2001, B's basis in his stock is $10 
    ($20 + $20 ($2,000 income/100 shares)--$15 ($1,500 distribution/100 
    shares)--$15 ($1,500 loss/100 shares).
        Example 5. Distributions by S corporations with earnings and 
    profits and net negative adjustment for taxable years beginning on 
    or after August 18, 1998. (i) Corporation S, an S corporation, has 
    accumulated earnings and profits of $1,000 and a balance in the AAA 
    of $2,000 on January 1, 2001. S's sole shareholder B holds 100 
    shares of stock with a basis of $20 per share as of January 1, 2001. 
    On April 1, 2001, S makes a distribution of $2,000 to B. B's pro 
    rata share of the income earned by S during 2001 is $2,000 and B's 
    pro rata share of S's losses is $3,500. For the taxable year ending 
    December 31, 2001, S has a net negative adjustment as defined in 
    section 1368(e)(1)(C). S does not make the election under section 
    1368(e)(3) and Sec. 1.1368-1(f)(2) to distribute its earnings and 
    profits before its AAA.
        (ii) The AAA is increased from $2,000 to $4,000 for the $2,000 
    of income earned during the 2001 taxable year. Because under section 
    1368(e)(1)(C)(ii) and Sec. 1.1368-2(a)(ii), the net negative 
    adjustment is not taken into account, the AAA is decreased from 
    $4,000 to $2,000 for the portion of the losses ($2,000) that does 
    not exceed the income earned during the 2001 taxable year. The AAA 
    is reduced from $2,000 to zero for the portion of the distribution 
    to B ($2,000) that does not exceed the AAA. The AAA is decreased 
    from zero to a negative $1,500 for the portion of the $3,500 of loss 
    that exceeds the $2,000 of income earned during the 2001 taxable 
    year.
        (iii) Under Sec. 1.1367-1(c)(1), the basis of a shareholder's 
    share in an S corporation stock may not be reduced below zero. 
    Accordingly, as of December 31, 2001, B's basis per share in his 
    stock is zero ($20 + $20 income--$20 distribution--$35 loss). 
    Pursuant to section 1366(d)(2), the $15 of loss in excess of B's 
    basis in each of his shares of S stock is treated as incurred by the 
    corporation in the succeeding taxable year with respect to B.
    * * * * *
        Par. 10. Sec. 1.1368-4 is revised to read as follows:
    
    
    Sec. 1.1368-4  Effective date and transition rule.
    
        Except for Secs. 1.1368-1(e)(2), 1.1368-2(a)(5), and 1.1368-3 
    Example 2, Example 4, and Example 5, Secs. 1.1368-1, 1.1368-2, and 
    1.1368-3 apply to taxable years of the corporation beginning on or 
    after January 1, 1994. Section 1.1368-1(e)(2), Sec. 1.1368-2(a)(5), and 
    Sec. 1.1368-3 Example 2, Example 4, and Example 5 apply only to taxable 
    years of the corporation beginning on or after August 18, 1998. For 
    taxable years beginning before January 1, 1994, and taxable years 
    beginning on or after January 1, 1997, and before August 18, 1998, the 
    treatment of distributions by an S corporation to its shareholders must 
    be determined in a reasonable manner, taking into account the statute 
    and legislative history. Except with regard to the deemed dividend rule 
    under Sec. 1.1368-1(f)(3), Sec. 1.1368-1(e)(2), Sec. 1.1368-2(a)(5), 
    and Sec. 1.1368-3 Example 2, Example 4, and Example 5, return positions 
    consistent with Secs. 1.1368-1, 1.1368-2, and 1.1368-3 are reasonable 
    for taxable years beginning before January 1, 1994. Return positions 
    consistent with Secs. 1.1368-1(e)(2), 1.1368-2(a)(5), and 1.1368-3 
    Example 2, Example 4, and Example 5 are reasonable for taxable years 
    beginning on or after January 1, 1997, and before August 18, 1998.
    
    PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
    
        Par. 11. The authority citation for part 602 continues to read as 
    follows:
    
        Authority: 26 U.S.C. 7805.
    
        Par. 12. In Sec. 602.101, paragraph (b) is amended by adding an 
    entry for 1.1366-1 to the table to read as follows:
    
    
    Sec. 602.101  OMB Control numbers.
    
    * * * * *
        (b) * * *
    
    ------------------------------------------------------------------------
                                                                 Current OMB
         CFR part or section where identified and described      control No.
    ------------------------------------------------------------------------
     
                      *        *        *        *        *
    1.1366-1...................................................    1545-1613
     
                      *        *        *        *        *
    ------------------------------------------------------------------------
    
    
    [[Page 71652]]
    
    Robert E. Wenzel,
    Deputy Commissioner of Internal Revenue.
    
        Approved: December 13, 1999.
    Jonathan Talisman,
    Acting Assistant Secretary of the Treasury.
    [FR Doc. 99-32697 Filed 12-21-99; 8:45 am]
    BILLING CODE 4830-01-U
    
    
    

Document Information

Published:
12/22/1999
Department:
Internal Revenue Service
Entry Type:
Rule
Action:
Final regulations.
Document Number:
99-32697
Pages:
71641-71652 (12 pages)
Docket Numbers:
TD 8852
RINs:
1545-AT52: Passthrough of Items to Shareholders
RIN Links:
https://www.federalregister.gov/regulations/1545-AT52/passthrough-of-items-to-shareholders
PDF File:
99-32697.pdf
CFR: (19)
26 CFR 1.1366-2(a)(2)
26 CFR 1.1368-2(a)(3)(iii))
26 CFR 1.1377-1(b)(3)(i)
26 CFR 1.1368-1(e)(1)
26 CFR 602.101
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