AICPA Comments on Proposed Regulations Concerning Allocation Based Upon Gross Receipts of Eligible Terminated S Corporations

December 23, 2019

Washington, D.C. (December 23, 2019) – The American Institute of CPAs (AICPA) has issued recommendations to the Department of the Treasury and the Internal Revenue Service (IRS) on proposed regulations regarding eligible terminated S corporations (ETSC) under section 1371(f) of the Internal Revenue Code. These comments supplement comments submitted earlier this year by the AICPA on adjustments attributable to conversions from S Corporation to C Corporation under section 481(d).

Section 1371(f) provides that distributions of money made by an ETSC are sourced either partially or entirely from any remaining balance of the accumulated adjustments account (AAA) of the ETSC.

In November, Treasury and the IRS released proposed regulations that describe how taxpayers are to determine the amount of a distribution made by an ETSC that is sourced from AAA and how much is sourced from the historical accumulated earnings and profits. Additionally, the proposed regulations remove the limitation that the distribution of money during a post termination transition period only qualifies under section 1371(e) to the extent made to shareholders that were shareholders on the date the former S corporation terminated its S corporation status.

The AICPA suggests the following recommendations to the proposed regulations:

  1. Clarify that the status of an ETSC and the AAA are attributes that transfer under section 381 in order for the enjoyment of the benefits of section 1371(f) following certain transactions, such as reorganizations or liquidations.
  2. Create a new post termination transition period (PTTP) that will equal the 120-day period beginning on the date the Proposed Regulations are finalized.
  3. Confirm that the PTTP and ETSC rules apply to an S corporation without earnings and profits (E&P) at the time that its S selection is terminated.