Are distributions from the other adjustment account (OAA) taxable to an S shareholder?

Distributions from the Other Adjustment Account (OAA) are not taxable to an S corporation shareholder for several reasons. The OAA is a component of the S corporation's accumulated adjustments account (AAA), which tracks the S corporation's income and losses that have not been previously distributed to shareholders. When an S corporation distributes amounts that have previously been taxed to the shareholders through the AAA (or OAA), those distributions are considered to be a return of capital and are not taxable.

The purpose of the OAA is to handle adjustments related to items that don’t affect the earnings and profits but may affect the basis of the shareholders' stock. Distributions that come from the OAA typically do not represent a realized gain for the shareholder, meaning there would be no immediate tax liability. Instead, these distributions affect the basis of the shareholder's stock in the corporation, which may have tax implications upon the eventual sale of the stock.

This distinction is crucial because, while payouts under certain conditions in other accounts (like the AAA itself under specific circumstances) could lead to tax implications, the OAA specifically aims to ensure that shareholders do not get taxed multiple times on the same earnings.