AICPA Writes IRS about Proposed Regulations on Shareholder Debt of S Corporations

December 20, 2012

The American Institute of CPAs wrote the Internal Revenue Service on Nov. 13, 2012 supporting the IRS’s proposed regulation to clarify the proper treatment of shareholder debt of S corporations.  In its letter, the AICPA also suggested that IRS include in the regulation an example it provided to help tax preparers better understand basis for S corporation shareholders.

AICPA Tax Executive Committee Chairman Jeffrey A. Porter, CPA, wrote, “The proposed regulations will, when final, substantially reduce the uncertainty clouding the proper treatment of shareholder debt under section 1366 of the Internal Revenue Code.  We appreciate and applaud the Service for adding more clarity and fairness in tax administration.”

In an effort to provide further clarity, the AICPA recommended and offered specific language for inclusion in any final regulations regarding the issue of bona fide indebtedness.

Porter said the AICPA believes it is important to include its example because “members of the AICPA’s S Corporation Tax Technical Resource Panel recently presented on the subject of basis in S corporation stock and debt at the IRS Nationwide Tax Forums.  Based on this experience, we believe the proper understanding of basis is still an issue for many tax preparers.”

Furthermore, the AICPA said, the regulations should apply retroactively.  “The proposed regulations represent the correction of years of misunderstandings regarding loans from a shareholder to an S corporation,” Porter said.  “The resources of both taxpayers and the government should not be wasted needlessly disputing prior interpretations of a statute that applies as equally to open years as it does to future years.”