Prior to determining gain or loss from liquidating distributions, a shareholder’s stock basis is first adjusted for current-year pass-through items. Treas. Reg. § 1.1367-1(d)(1). Pass-through losses suspended because of basis limitation rules that remain after the basis of the redeemed stock has been reduced to zero do not reduce gain or increase loss resulting from liquidation. If a shareholder is going to increase basis to use up suspended losses, this must be done before the final distribution through additional capital contributions or loans or the loss will be permanently disallowed under the general rule of § 1.1366-2(a)(5). There is no authority allowing a shareholder to restore basis after liquidation is completed as can be done under the post-termination transition period rules. IRC § 1366(d)(3).
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