Steven R. and Terry D. Williams, (1998)

Extract

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Steven R. and Terry D. Williams, (1998)

110 T.C. No. 4

UNITED STATES TAX COURT STEVEN R. AND TERRY D. WILLIAMS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 18298-95. Filed January 21, 1998.

P, a shareholder in an S corporation (S), received a 3X distribution from S during 1990. S's Accumulated Adjustment Account (AAA), under sec. 1368, I.R.C., had a 3X balance as of the beginning of 1990. S had a 2X loss for 1990. When subch. S status was elected for S, its predecessor subch. C corporation had in excess of 2X accumulated earnings and profits. To the extent that the 3X distribution for 1990 exceeds the balance of the AAA, P would be taxable for such excess as a dividend to the extent it did not exceed the accumulated earnings and profits from the predecessor subch. C corporation. R determined that the 2X loss should be first subtracted from the 3X balance of the AAA before considering the 1990 distribution. R's determination would result in taxable ordinary income to P. P counters that distributions should be first subtracted from the AAA prior to any adjustmen...

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