Final rules 7
(a) General rule
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(1) Increases in basis The basis of each shareholder’s stock in an S corporation shall be increased for any period by the sum of the following items determined with respect to that shareholder for such period:
Cases: Nelson v. Commissioner, 110 T.C. 114 (1998)
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(A) the items of income described in subparagraph (A) of section 1366(a)(1),
Cases: United States v. Farley, 202 F.3d 198 (3rd Cir. 2000)
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(B) any nonseparately computed income determined under subparagraph (B) of section 1366(a)(1), and
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(C) the excess of the deductions for depletion over the basis of the property subject to depletion.
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(2) Decreases in basis The basis of each shareholder’s stock in an S corporation shall be decreased for any period (but not below zero) by the sum of the following items determined with respect to the shareholder for such period:
Amended 2006, 2008, 2010, 2013, 2014, 2015
- 2015 Pub. L. 114-113 Pub. L. 114–113 struck out “The preceding sentence shall not apply to contributions made in taxable years beginning after December 31, 2014.” at end of concluding provisions.
- 2014 Pub. L. 113-295 Pub. L. 113–295 substituted “December 31, 2014” for “December 31, 2013” in concluding provisions.
- 2013 Pub. L. 112-240 Pub. L. 112–240 substituted “December 31, 2013” for “December 31, 2011” in concluding provisions.
- 2010 Pub. L. 111-312 Pub. L. 111–312 substituted “December 31, 2011” for “December 31, 2009” in concluding provisions.
- 2008 Pub. L. 110-343 Pub. L. 110–343 substituted “December 31, 2009” for “December 31, 2007” in concluding provisions.
- 2006 Pub. L. 109-280 Pub. L. 109–280, which directed the addition of concluding provisions to section 1367(a)(2), without specifying the act to be amended, was executed to subsec. (a)(2) of this section, which is section 1367 of the Internal Revenue Code of 1986, to reflect the probable intent of Congress.
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(A) distributions by the corporation which were not includible in the income of the shareholder by reason of section 1368,
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(B) the items of loss and deduction described in subparagraph (A) of section 1366(a)(1),
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(C) any nonseparately computed loss determined under subparagraph (B) of section 1366(a)(1),
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(D) any expense of the corporation not deductible in computing its taxable income and not properly chargeable to capital account, and
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(E) the amount of the shareholder’s deduction for depletion for any oil and gas property held by the S corporation to the extent such deduction does not exceed the proportionate share of the adjusted basis of such property allocated to such shareholder under section 613A(c)(11)(B).
Amended 1984, 1996
- 1996 Pub. L. 104-188 Pub. L. 104–188, § 1702(h)(14), substituted “section 613A(c)(11)(B)” for “section 613A(c)(13)(B)”.
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 722(e)(2), substituted “for any oil and gas property held by the S corporation to the extent such deduction does not exceed the proportionate share of the adjusted basis of such property allocated to such shareholder under section 613A(c)(13)(B)” for “under section 611 with respect to oil and gas wells”.
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The decrease under subparagraph (B) by reason of a charitable contribution (as defined in section 170(c)) of property shall be the amount equal to the shareholder’s pro rata share of the adjusted basis of such property.
(b) Special rules
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(1) Income items An amount which is required to be included in the gross income of a shareholder and shown on his return shall be taken into account under subparagraph (A) or (B) of subsection (a)(1) only to the extent such amount is included in the shareholder’s gross income on his return, increased or decreased by any adjustment of such amount in a redetermination of the shareholder’s tax liability.
(2) Adjustments in basis of indebtedness
Cases: Nathel v. Commissioner, 615 F.3d 83 (2d Cir. 2010)
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(A) Reduction of basis If for any taxable year the amounts specified in subparagraphs (B), (C), (D), and (E) of subsection (a)(2) exceed the amount which reduces the shareholder’s basis to zero, such excess shall be applied to reduce (but not below zero) the shareholder’s basis in any indebtedness of the S corporation to the shareholder.
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(B) Restoration of basis If for any taxable year beginning after December 31, 1982, there is a reduction under subparagraph (A) in the shareholder’s basis in the indebtedness of an S corporation to a shareholder, any net increase (after the application of paragraphs (1) and (2) of subsection (a)) for any subsequent taxable year shall be applied to restore such reduction in basis before any of it may be used to increase the shareholder’s basis in the stock of the S corporation.
Amended 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 721(w), substituted “for any taxable year beginning after December 31, 1982, there is” for “for any taxable year there is”.
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(3) Coordination with sections 165(g) and 166(d) This section and section 1366 shall be applied before the application of sections 165(g) and 166(d) to any taxable year of the shareholder or the corporation in which the security or debt becomes worthless.
Amended 1984
- 1984 Pub. L. 98-369 Pub. L. 98–369, § 721(d), inserted “and 166(d)” in heading and text.
(4) Adjustments in case of inherited stock
Amended 1996
- 1996 Pub. L. 104-188 Pub. L. 104–188, § 1313(a), added par. (4).
(A) In general If any person acquires stock in an S corporation by reason of the death of a decedent or by bequest, devise, or inheritance, section 691 shall be applied with respect to any item of income of the S corporation in the same manner as if the decedent had held directly his pro rata share of such item.
(B) Adjustments to basis The basis determined under section 1014 of any stock in an S corporation shall be reduced by the portion of the value of the stock which is attributable to items constituting income in respect of the decedent.