When a shareholder holds multiple shares of stock with varying basis, pass-through losses are allocated pro rata to all shares. Any loss exceeding a specific share’s basis then triggers the “spillover rule,” which requires the excess loss to be reallocated and applied proportionately to the remaining shares owned by the shareholder. This allows the shareholder to deduct additional losses that would have been suspended for lack of basis in a particular block of stock. (See Reg. §1.1367-1(c)(3) and (h), Ex. 2.)
Q. An S corporation shareholder obtained shares of stock at different times, and, therefore, the shareholder has separate basis in each block of stock. In the current year, the S corporation recognizes and passes through losses to its shareholders. How is the loss applied in this situation where the shareholder has different basis in each share of stock?
A.