The American Institute of CPAs (AICPA) submitted a comment letter on September 18 to the Internal Revenue Service (IRS) and the Department of the Treasury recommending that S corporations be allowed an ordinary loss deduction treatment for worthless stocks under Internal Revenue Code (IRC) section 165(g)(3) rather than a capital loss treatment under section 165(g)(1). If adopted, the recommendation would equalize the worthless stock deductions treatment of S corporations with C corporations.
While section 165(g)(3) does not define “worthless,” courts have used various standards to determine that a stock is worthless relating to the value of a company. Authorities thus far do not conclusively establish whether an S corporation is entitled to ordinary loss treatment under section 165(g)(3), thus necessitating further guidance from the IRS and the Treasury Department. The AICPA explained that IRC section 165(a) provides that a deduction is allowed for any loss sustained during the taxable year and not compensated for by insurance or otherwise. Section 165(g)(1) provides that, if any security that is a capital asset becomes worthless during the taxable year, the loss from worthlessness is treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset.
In the letter, Troy K. Lewis, chair of the AICPA Tax Executive Committee, stated, “We encourage the IRS and Treasury to provide guidance that an S corporation is entitled to the benefits of section 165(g)(3) to the same extent as a C corporation. We believe our proposed approach offers equity and fairness, which is a principle of good tax policy that advocates for similarly situated taxpayers to have similar taxation.”
This specific item is listed in the Department of the Treasury 2015-2016 Priority Guidance Plan as the first priority of the S corporations category.