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Modifying the order of distribution rules for an S corporation with AE&P.

Publication: The Tax Adviser
Publication Date: 01-OCT-07 		Format: Online
Delivery: Immediate Online Access
Full Article Title: Modifying the order of distribution rules for an S corporation with AE&P.(accumulated earnings and profits)

Article Excerpt
A distribution from an S corporation is generally treated as made from the corporation's accumulated adjustments account (AAA) tax flee to the extent of a shareholder's basis. It is then treated as taken from any remaining balance of AAA and is taxed at capital gain rates. Next, it is treated as a tax-free reduction of previously taxed income (PTI), which consists of S corporation earnings from tax years beginning 1982 and earlier, and then as a taxable dividend to the extent of accumulated earnings and profits (AE&P). After AE&P is exhausted, any remaining distribution amount is treated as tax flee to the extent of the shareholder's basis, and the balance is treated as a capital gain.

Because of these ordering rules, any AE&P are essentially "trapped" in this group of undistributed earnings until AAA and PTI are fully...

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