Section 40-18-164 Increase or Decrease in Basis of Shareholder’s Stock; Special Rules.

(a) The basis of each shareholder’s stock in an Alabama S corporation shall be increased for any period by the sum of the following items determined with respect to that shareholder for the period: (1) The items of income described in subdivision (1) of subsection (a) of Section 40-18-162. (2) Any nonseparately computed income determined under subdivision (2) of subsection (a) of Section 40-18-162. (3) The excess of the deductions for depletion over the basis of the property subject to depletion. (b) The basis of each shareholder’s stock in an Alabama 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 the period: (1) Distributions by the corporation which were not includable in the income of the shareholder by reason of Section 40-18-165. (2) The items of loss and deduction described in subdivision (1) of subsection (a) of Section 40-18-162. (3) Any nonseparately computed loss determined under subdivision (2) of subsection (a) of Section 40-18-162. (4) Any expense of the corporation not deductible in computing its taxable income and not properly chargeable to capital account. (5) 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 the shareholder. (c) The following special rules shall apply: (1) The increases under subsection (a) and the decreases under subsection (b) shall include the entire amount, without allocation and apportionment under Chapter 27, of the shareholder’s pro rata share of such increases and decreases during the taxable year. (2)a. If for any taxable year the amounts specified in subdivisions (2), (3), (4), and (5) of subsection (b) of this section exceed the amount which reduces the shareholder’s basis to zero, the excess shall be applied to reduce, but not below zero, the shareholder’s basis in any indebtedness of the Alabama S corporation to the shareholder. b. If for any taxable year there is a reduction under paragraph (a) of this subdivision in the shareholder’s basis in the indebtedness of an Alabama S corporation to a shareholder, any net increase, after the application of subsections (a) and (b) of this section, 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 stock of the Alabama S corporation. (3) This section and Sections 40-18-162 and 40-18-163 shall be applied before determining the amount of loss in any taxable year of the shareholder or the corporation in which the security or debt becomes worthless. (4) An item of income which is required to be included in the gross income of a shareholder and shown on his or her return shall be taken into account under subdivisions (a)(1) and (a)(2) of this section only to the extent such amount is included in the shareholder’s gross income on his or her return, increased or decreased by any adjustment of such amount in a redetermination of the shareholder’s tax liability. If an item of income is subject to allocation and apportionment, the basis increases provided by subdivisions (a)(1), (a)(2), and (c)(1) shall be allowed only in the proportion that the amount of such income reported on the taxpayer’s return bears to the amount of income properly allocated and apportioned to Alabama and required to be included in gross income and reported by the shareholder, increased or decreased by any adjustment of such amount in a redetermination of the shareholder’s tax liability. (5) Adjustments in case of inherited stock. a. If any person acquires stock in an Alabama S corporation by reason of the death of a decedent or by bequest, devise, or inheritance, then the treatment of any item of income of the S corporation shall be determined in accordance with 26 U.S.C. § 691, which shall be applied as if the decedent had held directly his or her pro rata share of such item. b. The basis determined under Section 40-18-6 of any stock in an S corporation shall be reduced by the portion of the value of the stock that is attributable to items constituting income in respect of the decedent.