Final Reg

Federal Register/Vol.

--

64,

22, 19991Rules and Regulations

Internal Revenue Service
26 CFR Parts 1 and 607

,:

-

I',

i

4-

-

,i 1)-

+

RIM 1545-AT 52

Passthrough d Items of an S
Corporation to its Shareholders
AGENCY: Lnternal Revenue Service (IRS),

Treasury.
A C f l W : Final regulations.
This document contains h a 1
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 5
corporation. Changes to the applicable
law were lnadc by the Subchapter S
Rovision Act of 1082, t h Tax
~ Reform
Act of 1984, I h e Tax Reform Act of
1986,the Technical and Miscellaneous
Revenue Act of f 988, and the Small
Busine3s Job Protection Act of 1996.
These regulations provide the public
with guidance needed to comply with
the spplicabie law a n d will aHect S
cilrporations and their shnreholders.
DATES: E ~ e o t ~ v
Dole:
a These regulations
areeffactivo Aughsl 18, 1998.
Appiicabilily Dntes: For dales of
applicabilily, see 5 1.1366-5, 5 1.13673, and 5 1.1368-4, plus Transition Rule
and Effective Data under
SUMMARY:

SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT:

Suggestions for reducing this burden
should b e sent to the Internal Revenue
Service. Attn: IRS Reports Clearance
Otscer. 0P:FS:FP. Washington, DC
20224, and to the Office of Management
and Budget. Attn: Desk Officar for tho
Department of the Treasury, Office of
Information and Reeuletorv Affairs.
Washington, DC: 2 0 k i 3 . '
Books or records relating to this
collection of information must be
retained as long as lheir contents may
hecome material in the administration
of any intornd 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
to provide additional rules under

1

sections 1366, 1367, and 1368 relating
to the passthrough of items of an S
corporatinn to its shareholders, the
adjustments to the basis of stock of the
sbarsholders, and the treatment of
distributions by an S corporati~n.
On August 18, 1998, the 1RS
published in t h e Federal Register (63
FR 44181), a notice of proposod
rulemaking (REG10Y44fi-82) regarding
sections 1366, 1307, a n d 1368.
Cotnments responding l o the proposed
regulatio~iswere reccived. ?'he public
hearing was canceled because t h ~ r i l
were no requests to speak. Afier
considering the comments received, the
proposed regulations ara adopted a s
amended by t h i s Treasury decision

Explanation of Revisions and Summary
Concerning the regulations under
of Cornmenls
section 1366, Martin Schaffer, Deane M.
1. A g p g a tion of Deductions Frv~non S
Burke, or David Shululan (202) 622Corporation With Dsducfions From
3070; concurning the regillations under
sections 1367 and 3368, Brenda Stewarl, Otlter Soutces
(202) 622-3120.
The proposed regulations provide that
a shareholder of an S corporation must
SUPPLEMENTARY INFOPMATION:
Paperwork Reduction Act
'l'he collection of information
contained in these final regulations has
bnen reviewed and approved by the
Offic~!of Management and Budget in
acco~dancr!with the Paperwork
Reduction Act of l W 5 114 U.S.C. 3507)
under control number 1545-1613
Rwponses to thls collectic~nof
informotio~laro mandatory.
An agency may not cocduct or
sponsor, and a person is not required to
respond to, a collection of information
unluss the collection of informtion
d i s p l a ~ sa valid control number.
The burdnn for this roquiremsnt is
reflecled in the burdon of Form 1040,
"U.S.Individual I~icornaTax Rat urn",
and Form 11 ZUS, "I1.S. Inconlo Tax
Return for an S corporation".

71641

-

-

DEPARTMENT OF THE TREASURY

R D 88521

No. 245/Wednesday, December

aggregatu its sepamtr: deductions and

sxclusions with the shareholdor's pro
rata share of the S corpnra!ion's
separatoly stated dsduulions or
exciusions in det ormining tho allowable
amount of any deduction or ~xcIusion
that is suhiecl to a limitation In the
Code.

The proposed regulations provide a n
example nf this rule for propertv
expensed under section 179. A

commentator suggsstnd that the
example implies that a shareholder
must expense its pro rata share of
section 1 7 9 Expense from the S
corporation hefore it can expense any
separatoly acquired property.
Tho examplo is infended to illusirate
Iha[ a shareholder may expense only up
to the alnounl allowable under section
179 in any given yoar r ~ g a r d l ~ of
ss

whelher the property is owned
individually or through an S
corporation. The example is not
intended to imply that a shareholder
must elect to expense properlv held in
an S corporation before it can expense
any separately acquired property.
However, once an S cor~orationclects
to expense property under section 179,
a shareholder w ~ l generally
l
elect to
expense personal propertv only to the
extent the shareholder's pro rata share
of the corporation's section 179 Expense
dons not excwd the shareholder's
individual limitation under section
179tbI. Accordingly, no modifications
have been made to the exan~ploin t he
final regulations.
The Cbrnmbnlatbt also xsque~tedthat
the final regulations provide additional
examples that illustrate the aggregarion
of thrr shareholdor's pro rata share a €
deductions and exclusions Front an S
corporation with deductions and
exclusions from other sources and the
operation of any limitations on those
aggregated deductions and exclusions.
Specifically, the cornmenlalor requested
that the final regulations include a n
example in which the shareholder's
aggregate section 179 expenses from
severai passthrough sources excccds the
maximum section 179 expeuso
allowable. The allocation of the sedion
179 expense among ihe va~ioussources
is more approprintclv addressed in the
regulations under section 179 and is
beyond the scope of these regulations.
Accordingly, the final regulations d D not
adopt this comment.
a. Rechoracterrxutjon of Gnins and
Losses ol the ShareholderLevel
Generally, the items of an S
corporation that arc passed through, arid
reported by, n shareholder are
characterized at the corporate level in
the same mannor that partnership itenis
characterized a t the partnerjhip
1evnl.
Idowever, the proposod regulations
also contain exceptions to this general
rulc fnr contributions of either
noncapital gain property or capital loss
property if an S corporatio~his formed
or availed ot by any shareholder or
shareholders for a principal purposc of
selling or oxchangi~lgthe property that
in the hands of the shareholdnr or
shareholders would have produced a
different character of gain 01.Inss. The
character of h e gain nr loss will be the
same as it would have been if iht?
property were i n the hands uf thr:
shareholdor or shareholders at the lime
of the sale or exchange.
Con~n~entators
suggested that, in the
absence o f a statutory provision like
section 724 in the parinership conlext,
a m