• One of the theories underlying the accumulated-adjustments account is that the shareholders should not be permitted to avoid dividend-tax treatment on a corporation’s accumulated earnings just because the corporation converts from C status to S status. IRC (26 USCA) § 1368(e)(1). — Abbr. AAA. [Cases: Internal Revenue 3896. C.J.S. Internal Revenue §§ 376–377.]
accumulated adjustments account
Tax. An item on the books of an S corporation (usu. an equity item on the corporation’s balance sheet) to account for taxable-income items passed through to shareholders, such as accumulated earnings — earned before the corporation converted from a C corporation to an S corporation — that would have been distributed as a dividend to the shareholders if the corporation had remained a C corporation.
