That investment includes total premiums paid minus nontaxable distributions
such as dividends, outstanding loans and previous tax-free withdrawals.
He argued that if they were nontaxable distributions
, he had no tax deficiency as a result of his receipt of the funds, and consequently he could not be convicted of criminal tax evasion.
The IRS however, may recharacterize what S corporations classify as nontaxable distributions
as wages and salaries subject to employment taxes.
To the extent an employee recognizes income when contributions are made to the trust, the employee has a basis for tax purposes, resulting in nontaxable distributions
1368(c)(3) (covering nontaxable distributions
made after the accumulated adjustments account (AAA) and AE&P have been distributed).
Capital contributions made during the loss year would increase stock basis and would allow larger nontaxable distributions
and loss deductions.
In addition, the taxpayer may have basis adjustments for nontaxable distributions
and for any long-term capital gains that may be retained by the fund.