## Facts

- Everette D. Knott and Frieda M. Knott were individual taxpayers who came before the United States Tax Court in a deficiency dispute with the Commissioner of Internal Revenue.
- Everette Knott owned a 24.5% interest in West Augusta Company.
- West Augusta Company was a Subchapter S corporation for the taxable year at issue.
- Under the S corporation rules, West Augusta’s taxable income for the year was allocated among its shareholders, including Knott, in proportion to ownership.
- West Augusta made no distribution to its shareholders for that taxable year.
- The Commissioner sought to tax Knott on his share of West Augusta’s taxable income even though West Augusta did not distribute cash to him.
- Knott challenged the Commissioner’s assessment in the United States Tax Court.

## Issues

1. Must a shareholder of a Subchapter S corporation include in gross income his pro rata share of the corporation’s taxable income for the year even when the corporation makes no distribution to shareholders?

## Decision

- The Tax Court ruled for the Commissioner.
- The court held that Knott, as an S corporation shareholder, was required to include in income his pro rata share of West Augusta’s taxable income for the year at issue even though West Augusta made no distributions.

## Legal Principles

- Under Subchapter S, corporate taxable income generally passes through to shareholders and is taken into account on the shareholders’ federal income tax returns in proportion to their ownership interests.
- A shareholder’s obligation to report pass-through S corporation income is not conditioned on the corporation making a cash (or other) distribution to the shareholder.
- The tax treatment of S corporation distributions is distinct from, and does not control, the shareholder-level inclusion of the corporation’s taxable income.

## Conclusion

Knott v. Commissioner holds that an S corporation shareholder must include in gross income his pro rata share of the corporation’s taxable income for the year, even if the corporation made no distributions, and the Tax Court sustained the Commissioner’s effort to tax Knott on West Augusta’s undistributed income.


Knott v. Commissioner, 62 T.C.M. 287 (1991)