Federal Taxation — Complete Course

U.S. federal taxation rests on a hierarchy of AUTHORITIES. The CONSTITUTION grants Congress the power to tax; the Sixteenth Amendment (1913) permits income taxation without apportionment. STATUTORY authority is the INTERNAL REVENUE CODE OF 1986 (Title 26 U.S.C.), amended continually — most recently by the TCJA (2017), CARES Act (2020), the Inflation Reduction Act (2022), and SECURE 2.0 (2022). ADMINISTRATIVE authority includes TREASURY REGULATIONS (highest weight — Final > Temporary > Proposed), REVENUE RULINGS and REVENUE PROCEDURES (IRS positions on specific facts), PRIVATE LETTER RULINGS (binding only on the taxpayer who requested it), and various IRS publications and instructions (helpful but not authoritative). JUDICIAL authority comes from the U.S. TAX COURT (no prepayment required), U.S. DISTRICT COURTS (jury available, must pay first and sue for refund), the COURT OF FEDERAL CLAIMS, appealed to the CIRCUIT COURTS, and finally the U.S. SUPREME COURT.

The federal INCOME TAX applies to INDIVIDUALS, C corporations, estates, and trusts. Partnerships, S corporations, and most LLCs are FLOW-THROUGH (or pass-through) entities — income is taxed once at the owner level. The BASIC INCOME TAX FORMULA for an individual is: (1) GROSS INCOME (§61 — all income from whatever source derived, unless excluded), (2) minus ADJUSTMENTS ("above-the-line" deductions) = ADJUSTED GROSS INCOME (AGI), (3) minus the greater of the STANDARD DEDUCTION or ITEMIZED DEDUCTIONS, (4) minus the QUALIFIED BUSINESS INCOME (QBI) deduction (§199A) if applicable = TAXABLE INCOME, (5) multiplied by tax RATES (progressive brackets: 10, 12, 22, 24, 32, 35, 37% for 2024/2025), (6) minus CREDITS (dollar-for-dollar reductions), (7) plus other taxes (SE tax, AMT, NIIT, additional Medicare tax) = TAX DUE (or refund).

TAX PROFESSIONALS must comply with CIRCULAR 230 (Treasury Department regulations governing practice before the IRS), the AICPA STATEMENTS ON STANDARDS FOR TAX SERVICES (SSTS), and IRC §6694 (return-preparer penalties). Key duties include due diligence, competence, avoiding conflicts of interest, and — for return positions — meeting the REASONABLE BASIS (~20%), SUBSTANTIAL AUTHORITY (~40%), or MORE-LIKELY-THAN-NOT (>50%) thresholds depending on whether the position is disclosed. TAX AVOIDANCE (arranging affairs to minimize tax within the law — Judge Learned Hand's classic principle) is legal. TAX EVASION (fraud or concealment) is criminal. Preparers who sign returns are subject to the §6694(a) unreasonable-position penalty ($1,000 or 50% of income) and §6694(b) willful/reckless penalty ($5,000 or 75% of income).

IRC §61 defines GROSS INCOME as "all income from whatever source derived," including but not limited to: compensation for services, gross income from business, gains from dealings in property, interest, rents, royalties, dividends, alimony (pre-2019 divorces), annuities, income from life insurance and endowment contracts, pensions, income from discharge of indebtedness, distributive share of partnership income, income from an interest in an estate or trust, and income in respect of a decedent. The COMMISSIONER v. GLENSHAW GLASS (1955) test defines income as any "accession to wealth, clearly realized, over which the taxpayer has complete dominion." The realization principle means unrealized appreciation is generally NOT taxed until a taxable event occurs.

STATUTORY EXCLUSIONS are Congress's decisions to remove items from gross income. Major exclusions include: GIFTS AND INHERITANCES (§102); LIFE INSURANCE PROCEEDS paid by reason of death (§101); MUNICIPAL BOND INTEREST (§103); COMPENSATION FOR PHYSICAL INJURIES AND SICKNESS (§104); EMPLOYER-PROVIDED HEALTH INSURANCE (§106); QUALIFIED SCHOLARSHIPS for tuition and required fees (§117); GAIN ON SALE OF PRINCIPAL RESIDENCE up to $250,000 single / $500,000 MFJ if ownership/use tests met (§121); QUALIFIED EMPLOYEE FRINGE BENEFITS (§132 — no-additional-cost, qualified employee discount, working condition, de minimis, transportation up to statutory caps, moving expenses (military only post-TCJA), qualified retirement planning, and adoption assistance); CANCELLATION OF DEBT excluded in bankruptcy or to the extent of insolvency (§108). The general principle: an item is INCLUDED unless a code section EXCLUDES it.

TIMING matters. CASH-BASIS taxpayers recognize income when actually or CONSTRUCTIVELY RECEIVED (available without substantial restriction). ACCRUAL-BASIS taxpayers recognize income when the ALL-EVENTS TEST is met (right to income is fixed and amount is reasonably determinable) and economic performance has occurred. The CLAIM-OF-RIGHT DOCTRINE requires reporting income received without restriction even if it might have to be returned later; if returned, the taxpayer may take a deduction (§1341 provides mitigation if the deduction exceeds $3,000). The TAX BENEFIT RULE requires including a prior-year deduction recovery (like a state-tax refund of a previously itemized state tax payment) in income to the extent it produced a benefit. Court decisions such as EISNER v. MACOMBER (realization required for a stock dividend) and HORST (assignment-of-income doctrine — income taxed to earner) fill in the interpretive gaps.

Deductions are grouped by WHERE they appear on Form 1040. "ABOVE-THE-LINE" (or FOR-AGI) deductions reduce gross income to arrive at ADJUSTED GROSS INCOME. Major above-the-line items: trade or business expenses of a self-employed person (Schedule C), rental and royalty expenses (Schedule E), losses from sales of business property, contributions to traditional IRAs and self-employed retirement plans (SEP, SIMPLE, solo 401(k)), the deductible portion of self-employment tax (½ of SE tax), self-employed health insurance, HSA contributions, student-loan interest (subject to phase-out), educator expenses ($300 in 2024), and alimony (pre-2019 divorces). These are valuable because they reduce AGI, which is the base for many phase-outs (medical deduction, itemized deductions, QBI, credits).

"BELOW-THE-LINE" (or FROM-AGI) deductions are the STANDARD DEDUCTION or ITEMIZED DEDUCTIONS, whichever is larger. The 2025 STANDARD DEDUCTION is $15,000 single, $30,000 MFJ, $22,500 HoH, with additional amounts for age 65+ and blindness. ITEMIZED DEDUCTIONS (Schedule A) include: MEDICAL expenses exceeding 7.5% of AGI; STATE AND LOCAL TAXES (SALT) capped at $10,000 through 2025 (income OR sales, plus property); HOME MORTGAGE INTEREST on up to $750,000 of acquisition indebtedness (post-2017); INVESTMENT INTEREST limited to net investment income; CHARITABLE CONTRIBUTIONS (cash to public charities up to 60% AGI, appreciated LTCG property to public charities up to 30% AGI, with 5-year carryover); CASUALTY/THEFT LOSSES only from a federally declared disaster; and miscellaneous itemized deductions (mostly SUSPENDED for 2018-2025 by TCJA).

The QUALIFIED BUSINESS INCOME (QBI) DEDUCTION (§199A) — enacted by TCJA — allows a deduction of up to 20% of qualified business income from pass-through entities (sole proprietorships, partnerships, S corporations). Full 20% applies when TAXABLE INCOME BEFORE QBI is below $241,950 single / $483,900 MFJ (2025). Above the threshold, phase-outs apply, W-2 wage and unadjusted basis limitations kick in, and "SPECIFIED SERVICE TRADES OR BUSINESSES" (SSTBs — health, law, accounting, consulting, financial services, athletics, performing arts, and "any trade whose principal asset is the reputation or skill of one or more employees") begin to lose the deduction entirely. Above the phase-out ceiling, an SSTB gets ZERO QBI deduction. The QBI deduction is a FROM-AGI deduction that reduces taxable income but does NOT reduce AGI or self-employment tax.

REALIZED GAIN OR LOSS = AMOUNT REALIZED − ADJUSTED BASIS. Amount realized = cash + FMV of other property + debt relieved − selling expenses. Adjusted basis = original cost + capital improvements − depreciation/amortization − other basis reductions. RECOGNIZED gain or loss is the portion of realized gain/loss that must be reported currently; the Code contains several NONRECOGNITION provisions. BASIS RULES vary by acquisition: PURCHASE — cost basis; GIFT — donor's basis (carryover); if FMV at gift < donor's basis, use a DUAL BASIS (donor's basis for loss determination, FMV for gain — the anti-loss-shifting rule); INHERITANCE — FMV on date of death (§1014 STEP-UP, or step-down); TAXABLE EXCHANGE — cost = FMV; LIKE-KIND EXCHANGE — substituted basis.

NONRECOGNITION provisions include: §1031 LIKE-KIND EXCHANGES (post-TCJA limited to REAL PROPERTY held for productive use in a trade or business or for investment — NOT primary residences and NOT personal property); §1033 INVOLUNTARY CONVERSIONS (fire, theft, condemnation — defer gain if proceeds reinvested in similar-use property within 2 or 3 years); §121 SALE OF PRINCIPAL RESIDENCE ($250K/$500K exclusion); §1041 TRANSFERS BETWEEN SPOUSES (or incident to divorce — carryover basis, no recognition); §351 TRANSFERS TO CONTROLLED CORPORATION (see Module 8); §721 CONTRIBUTIONS TO PARTNERSHIP (see Module 9). §1031 requires: property held for productive use or investment, exchanged for like-kind real estate, using a QUALIFIED INTERMEDIARY, with 45-day identification and 180-day acquisition windows. BOOT (cash or non-like-kind property received) triggers recognized gain to the lesser of realized gain or boot.

CAPITAL vs ORDINARY character matters because CAPITAL GAINS enjoy preferential rates (0/15/20% for LONG-TERM held > 1 year; ordinary rates for SHORT-TERM). §1221 defines CAPITAL ASSETS by exclusion — everything is a capital asset EXCEPT: inventory, business receivables, depreciable business property and real property used in a trade or business (§1231), self-created copyrights/artistic compositions, and a few others. §1231 property (business real and depreciable property held > 1 year) gets "best-of-both-worlds" treatment: net gains are LONG-TERM CAPITAL GAINS, net losses are ORDINARY. §1245 DEPRECIATION RECAPTURE turns gain from sale of depreciable PERSONAL property into ORDINARY to the extent of prior depreciation. §1250 does the same for real property but only to the extent depreciation exceeded straight-line (rare post-1986); UNRECAPTURED §1250 GAIN is taxed at a max 25% rate for individuals. Net capital LOSSES for individuals are deductible against other income up to $3,000/year, with indefinite carryover.

MACRS (Modified Accelerated Cost Recovery System) is the mandatory depreciation system for most tangible business property placed in service after 1986. It assigns each asset a RECOVERY PERIOD based on class life: 3-year (racehorses, over-the-road tractors), 5-year (autos, light trucks, computers, office machinery), 7-year (office furniture and equipment, most machinery), 15-year (qualified improvement property, land improvements), 27.5-year (residential rental real estate, straight-line), and 39-year (nonresidential real property, straight-line). Personal property uses the 200% DECLINING BALANCE method switching to straight-line, with a HALF-YEAR CONVENTION for the year placed in service (or MID-QUARTER if more than 40% of new personal property is placed in service in the last quarter). Real property uses STRAIGHT-LINE with the MID-MONTH convention.

IRC §179 permits an ELECTION to immediately EXPENSE up to $1,220,000 (2024) of qualifying tangible personal property (and certain qualified improvement property and certain real-property items like roofs and HVAC on nonresidential buildings). §179 phases out dollar-for-dollar when total qualifying property placed in service exceeds $3,050,000 (2024). §179 CANNOT create or increase a business loss — it is limited to business taxable income (with carryover). BONUS (or ADDITIONAL FIRST-YEAR) DEPRECIATION under §168(k) permits a percentage of the cost of qualified property to be expensed immediately: 100% for property placed in service 9/28/2017–2022, then phased down to 80% (2023), 60% (2024), 40% (2025), 20% (2026), 0% (2027) unless Congress extends. Unlike §179, bonus CAN create a loss and is NOT subject to the dollar or investment cap.

The typical STACKING order to maximize current-year expense is: (1) §179 election (subject to dollar and phase-out limits, and income limitation); (2) bonus depreciation on the remaining basis; (3) MACRS on the balance. LISTED PROPERTY (autos, certain other assets) is subject to strict RECORDS requirements and §280F LUXURY AUTO CAPS ($20,400 first year with bonus for 2024, with reduced amounts if business use ≤ 50%). LEASEHOLD IMPROVEMENTS and INTANGIBLES have their own rules (§197 requires 15-year straight-line amortization of most acquired intangibles: goodwill, going concern, workforce, customer lists, licenses, franchises). ADS (Alternative Depreciation System) uses longer lives and straight-line and applies mandatorily to certain property (tax-exempt use, foreign use) and electively.

TAX CREDITS reduce TAX LIABILITY dollar-for-dollar (unlike deductions which reduce taxable income). Credits are either NONREFUNDABLE (limited to tax liability; unused amount may or may not carry over) or REFUNDABLE (can generate a refund even if no tax owed). Key NONREFUNDABLE credits include: CHILD & DEPENDENT CARE CREDIT (20-35% of qualifying expenses); ADOPTION CREDIT (up to $16,810 in 2024); LIFETIME LEARNING CREDIT (20% of first $10,000 of qualified education expenses = $2,000 max, per return, income phase-out); FOREIGN TAX CREDIT; ENERGY EFFICIENT HOME IMPROVEMENT CREDIT and RESIDENTIAL CLEAN ENERGY CREDIT (30% for solar/geothermal); and the SAVER'S CREDIT for low/moderate-income retirement contributions.

PARTIALLY OR FULLY REFUNDABLE credits include: the CHILD TAX CREDIT ($2,000/child, $1,700 refundable portion in 2024, phase-out beginning at $400,000 MFJ / $200,000 other); the CREDIT FOR OTHER DEPENDENTS ($500 nonrefundable); the AMERICAN OPPORTUNITY CREDIT (100% of first $2,000 + 25% of next $2,000 of qualified expenses = $2,500 max/student, 40% refundable, first 4 years of postsecondary); the PREMIUM TAX CREDIT (ACA marketplace subsidy); and the EARNED INCOME TAX CREDIT (EITC — for low-income working taxpayers, up to ~$7,830 in 2024 for 3+ children). The EITC has strict investment income limits and requires earned income; it is the most heavily audited credit due to error/fraud concerns and preparers must complete Form 8867 due-diligence.

The ALTERNATIVE MINIMUM TAX (AMT) is a parallel tax system to prevent high-income taxpayers from using preferences to eliminate tax. Compute REGULAR tax and TENTATIVE MINIMUM TAX (TMT); pay the greater. Formula: Taxable Income + adjustments and PREFERENCES (SALT deduction, private-activity bond interest, certain depreciation differences, ISO bargain element on exercise) = ALTERNATIVE MINIMUM TAXABLE INCOME (AMTI); minus AMT EXEMPTION ($85,700 single / $133,300 MFJ in 2024, phasing out at $609,350 single / $1,218,700 MFJ); × AMT rates (26% up to $232,600, 28% above) = TMT. If TMT > Regular Tax, the excess is AMT. TCJA raised the exemption and phase-out thresholds dramatically, so few individuals owe AMT now (about 200,000 filers vs. millions pre-TCJA). Corporate AMT was repealed by TCJA and replaced by a new 15% CAMT on very large corporations (over $1B avg book income) via the Inflation Reduction Act.

The choice of business entity is driven by TAXATION, LIABILITY PROTECTION, MANAGEMENT and OWNERSHIP flexibility, and CAPITAL-RAISING needs. Options are: SOLE PROPRIETORSHIP (unincorporated single owner — no liability protection; income on owner's Schedule C, subject to self-employment tax); GENERAL PARTNERSHIP (two or more; joint liability; flow-through on Form 1065 → K-1); LIMITED PARTNERSHIP (limited partners have liability limited to investment but usually can't manage); LIMITED LIABILITY COMPANY (LLC — state entity offering liability protection with flexible tax treatment: default disregarded if single-member, partnership if multi-member, may elect corporate/S treatment); C CORPORATION (separate taxpayer at 21% flat federal rate, dividends taxed again at shareholder level — CLASSIC DOUBLE TAXATION); S CORPORATION (small-business corporation electing flow-through under Subchapter S — pass-through, but with restrictions).

The C CORPORATION offers the strongest liability shield and unlimited ownership flexibility (multiple classes of stock, foreign owners, corporate owners), and its 21% rate can be attractive when profits are reinvested. Its downside is DOUBLE TAXATION: earnings taxed at the entity, then again as dividends (qualified dividends at 0/15/20% + potentially 3.8% NIIT). C corps face potential ACCUMULATED EARNINGS TAX (20% on excess retained earnings) and PERSONAL HOLDING COMPANY TAX. The S CORPORATION avoids double taxation and its distributive share is NOT subject to self-employment tax on the pass-through portion — a major planning benefit — but has strict eligibility: max 100 shareholders, only U.S. individuals/estates/certain trusts (no corporations, partnerships, or nonresident aliens), one class of stock (voting differences allowed), calendar-year default. Election is on Form 2553 by March 15 (or within 2½ months of formation).

PARTNERSHIPS (including LLCs taxed as partnerships) offer the greatest FLEXIBILITY: special allocations of specific items (with substantial economic effect requirement), no double taxation, and easy contribution of appreciated property without gain (§721). Downside: general-partner interests are subject to full SE tax on distributive share, and complex tax rules (basis, at-risk, passive-activity limits, §704(c) built-in gain allocation, §754 elections, hot assets §751). A COMPARISON SUMMARY: for tax, the S corp minimizes SE tax on distributions; the partnership offers flexibility; the C corp is best when reinvesting profits or planning IPO/VC funding. For liability, corporations and LLCs offer protection; a sole proprietorship offers none. Most tax practitioners default to the S corp or LLC-taxed-as-S-corp for closely held profitable service businesses, and the C corp for high-growth, high-reinvestment or externally funded companies.

IRC §351 permits TAX-FREE CONTRIBUTION of property to a corporation solely in exchange for STOCK when the transferor(s) are in CONTROL (owning ≥ 80% of voting stock AND 80% of each class of nonvoting stock) IMMEDIATELY after the exchange. Services do NOT qualify as property (services received for stock are ORDINARY income and count against control only if the recipient also contributes property of >10% of the service value). BOOT (cash or other property received) causes gain recognition equal to the LESSER of the boot received or the realized gain. Basis rules: shareholder's basis in stock = basis of property contributed + gain recognized − boot received − debt assumed by corporation. Corporation's basis in property = shareholder's basis + gain shareholder recognized. Debt assumed by the corporation is treated as boot ONLY IF total debt exceeds total basis (§357(c) gain).

C CORPORATIONS pay a FLAT 21% federal income tax (post-TCJA). Corporate tax return is Form 1120, filed by the 15th day of the 4th month after year-end (April 15 for calendar year), with an automatic 6-month extension available via Form 7004. Corporations use the DIVIDENDS-RECEIVED DEDUCTION (DRD): 50% for ownership < 20%; 65% for 20-<80%; 100% for ≥ 80% (affiliated group). NET OPERATING LOSSES (NOLs) generated post-TCJA carry FORWARD indefinitely and are limited to 80% of current-year taxable income (no carryback for most corporations). CHARITABLE contributions are limited to 10% of taxable income (before the deduction), with 5-year carryover. CAPITAL LOSSES for corporations offset only capital gains (no $3,000 individual deduction), with 3-year carryback and 5-year carryforward.

DISTRIBUTIONS to shareholders are DIVIDENDS to the extent of current or accumulated EARNINGS & PROFITS (E&P), then RETURN OF CAPITAL reducing stock basis, then CAPITAL GAIN. E&P is a tax accounting concept measuring the corporation's economic ability to distribute. QUALIFIED DIVIDENDS received by an individual shareholder are taxed at 0/15/20% + potentially 3.8% NIIT (holding-period test required). CORPORATE REDEMPTIONS (buybacks) are generally treated as DIVIDENDS unless one of the §302(b) tests is met (substantially disproportionate, not essentially equivalent to a dividend, complete termination, partial liquidation) — in which case they are SALES qualifying for capital-gain/basis recovery. LIQUIDATIONS: the corporation recognizes gain/loss on distribution of appreciated property (§336); shareholders treat the distribution as a sale of stock (§331) recognizing gain or loss for the difference between amount received and stock basis. Subsidiary liquidations under §332 are generally nonrecognition events between parent and 80%-owned subsidiary.

IRC §721 provides NONRECOGNITION on contributions of property to a partnership in exchange for a partnership interest — no gain or loss to the contributing partner OR the partnership, regardless of control. (Contrast with §351's 80% requirement.) Basis rules: partner's OUTSIDE BASIS = basis of contributed property + share of partnership liabilities. Partnership's INSIDE BASIS = contributed property's basis (carryover). SERVICES contributed for a partnership interest ARE taxable (compensation income), but a PROFITS-INTEREST-ONLY grant under Rev. Proc. 93-27 is generally not taxable if it meets safe-harbor conditions. §704(c) requires that BUILT-IN GAIN or loss at time of contribution be specially allocated back to the contributing partner when the property is later sold — this prevents shifting pre-contribution gain to other partners.

PARTNERSHIP OPERATIONS: partnerships are FLOW-THROUGH — no entity-level tax (except state fees). Form 1065 reports the partnership's income items; each partner receives a SCHEDULE K-1 showing their distributive share of ORDINARY income, SEPARATELY STATED ITEMS (capital gains/losses, §1231 gains, charitable contributions, tax-exempt interest, §179 expense, credits, etc.). Separately stated items retain their character. §704(b) requires allocations to have SUBSTANTIAL ECONOMIC EFFECT (SEE) or follow the partner's interest in the partnership. GUARANTEED PAYMENTS (compensation to a partner without regard to partnership income) are DEDUCTIBLE by the partnership and ORDINARY income to the partner (also subject to SE tax for GPs). Partner's OUTSIDE BASIS increases by contributions, distributive share of income, and increases in liability share; decreases by distributions, distributive share of losses, and decreases in liability share. Loss deductibility is limited by BASIS, AT-RISK (§465), and PASSIVE ACTIVITY (§469) rules.

DISTRIBUTIONS: CURRENT (nonliquidating) distributions are generally TAX-FREE — the partner reduces outside basis by cash received, then by the partnership's inside basis of any property received (never below zero). Cash distributions in excess of outside basis produce CAPITAL GAIN. LIQUIDATING distributions typically produce no gain unless cash exceeds outside basis; loss can be recognized only if the distribution consists solely of cash, unrealized receivables, and inventory, and outside basis exceeds those items. HOT ASSETS (§751 unrealized receivables and inventory items that are substantially appreciated) trigger ordinary income on sale of a partnership interest or on disproportionate distributions — they prevent converting ordinary income into capital gain. §754 ELECTION allows an adjustment to inside basis on transfer of an interest or on distributions to bring inside basis in line with outside basis — reducing distortion for subsequent transactions.

The S CORPORATION is a domestic corporation that ELECTS (Form 2553) to be taxed under SUBCHAPTER S — flow-through, generally no entity-level tax. ELIGIBILITY: (1) domestic corporation, (2) ≤ 100 shareholders (family members can be counted as one), (3) shareholders limited to U.S. INDIVIDUALS, ESTATES, and certain TRUSTS (Grantor, QSST, ESBT) — NO C corps, partnerships, or nonresident aliens, (4) ONE CLASS OF STOCK (voting rights may differ but economic rights cannot), (5) not an INELIGIBLE corporation (banks, insurance companies, DISCs). Election is due by the 15th day of the 3rd month of the tax year to be effective for that year. Termination is voluntary (by shareholder consent) or automatic (violation of eligibility, or 3 consecutive years of >25% passive investment income and accumulated E&P from C-corp days).

OPERATION: S corps file Form 1120-S, each shareholder receives a K-1. Income items are ORDINARY BUSINESS INCOME plus SEPARATELY STATED ITEMS (capital gains, §1231, charitable, §179, credits). Distributive share is NOT subject to SE tax — a major planning advantage over partnerships and sole proprietorships. However, the IRS requires REASONABLE COMPENSATION as W-2 wages to shareholder-employees before distributions — undercompensation is a top S-corp audit issue (the classic 'zero-salary S-corp' trap). Shareholder BASIS is critical: stock basis increases by capital contributions and distributive share of income (including tax-exempt); decreases by distributions and distributive share of losses/deductions. Shareholder DEBT BASIS applies only for loans DIRECTLY from shareholder to corporation (not third-party debt guaranteed by shareholder) — unlike partnerships where partners share partnership debt.

DISTRIBUTIONS to an S-corp shareholder are traced through the AAA (ACCUMULATED ADJUSTMENTS ACCOUNT — a corporate-level account tracking undistributed post-election S income). Order of distribution: (1) tax-free to the extent of AAA (reduces stock basis); (2) then DIVIDEND to the extent of any C-corp accumulated E&P (if the corp was previously a C corp); (3) then tax-free return of capital reducing basis; (4) then CAPITAL GAIN. Loss deductibility is limited to STOCK + DEBT BASIS; excess losses carry forward at the shareholder level until basis is restored. The at-risk and passive-activity limits also apply. TAX-YEAR requirement: S corps generally must use a calendar year unless a business purpose or §444 election supports a fiscal year (with required tax payments).