[Federal Register: October 20, 2008 (Volume 73, Number 203)]
[Rules and Regulations]
[Page 62199-62203]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20oc08-5]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9428]
RIN 1545-BD72
Section 1367 Regarding Open Account Debt
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to the
treatment of open account debt between S corporations and their
shareholders. These final regulations provide rules regarding the
definition of open account debt and the adjustments in basis of any
indebtedness of an S corporation to a shareholder under section
1367(b)(2) of the Internal Revenue Code (Code) for shareholder advances
and repayments on advances of open account debt. The regulations affect
shareholders of S corporations and are necessary to provide guidance
needed to comply with the applicable tax law.
DATES:
Effective Date: These regulations are effective on October 20,
2008.
Applicability Date: For dates of applicability, see Sec. 1.1367-3.
FOR FURTHER INFORMATION CONTACT: Stacy L. Short or Deane M. Burke,
(202) 622-3070 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document amends Sec. 1.1367-2 of the Income Tax Regulations
(26 CFR part 1) regarding the definition of open account debt and
adjustments in basis of indebtedness for shareholder advances and
repayments on advances of open account debt.
Section 1367(a)(1) provides that the basis of each shareholder's
stock in an S corporation is increased by the shareholder's pro rata
share of the S corporation's income (separately and nonseparately
computed items of income) and the excess of the deductions for
depletion over the basis of the property subject to depletion. Section
1367(a)(2) provides that the basis of each shareholder's stock in the S
corporation is decreased by the shareholder's distributions not
includible in income of the shareholder by reason of section 1368
(nontaxable distributions), and the shareholder's pro rata share of the
losses and deductions (separately and nonseparately computed losses),
any expense of the corporation that is not deductible and not properly
chargeable to capital account, and certain deductions for depletion for
any oil and gas property held by the S corporation. Under section
1367(b)(2)(A), if for any taxable year the amounts specified in section
1367(a)(2) (other than distributions) exceed the amount which reduces
the shareholder's basis to zero, such excess losses and deductions
shall be applied to reduce (but not below zero) the shareholder's basis
in any indebtedness of the S corporation to the shareholder. Section
1367(b)(2)(B) provides that if a shareholder's basis in indebtedness is
reduced for any taxable year, any net increase (the amount by which the
items described in section 1367(a)(1) exceed the items described in
section 1367(a)(2)) for any subsequent taxable year is applied to
restore the reduction in basis in indebtedness before any of the excess
is used to increase basis in stock.
On January 3, 1994, the Treasury Department and the IRS published
final regulations under section 1367 of the Code (TD 8508, 59 FR 12,
amended on December 22, 1999 (TD 8852, 64 FR 71641)). Those final
regulations relate, in part, to adjustments to basis in both stock of
shareholders and indebtedness of an S corporation to its shareholders.
Section 1.1367-2 of the Income Tax Regulations provides specific rules
for required adjustments (reductions and restorations) to basis in any
indebtedness of an S corporation to a shareholder. Section 1.1367-2(a)
also provides that for purposes of adjustments to basis of indebtedness
to shareholders, shareholder advances not evidenced by separate written
instruments and repayments on the advances (open account debt) are
treated as a single indebtedness. The basis adjustment rules under the
final regulations apply to all indebtedness of an S corporation to a
shareholder, whether the indebtedness is evidenced by a written
instrument or is open account debt. Taxpayers should also remember that
all advances to an S corporation by a shareholder are subject to the
general tax principles for debt, whether evidenced by a written
instrument or not.
On August 25, 2005, the Tax Court issued its decision in Brooks v.
Commissioner, TC Memo. 2005-204, involving open account debt. Under its
interpretation of Sec. 1.1367-2, the court in Brooks held ``that the
basis of the open account indebtedness is properly computed by netting
at the close of the year advances of open account debt during the year
and repayments of open account debt during the year.'' This allowed the
taxpayer in Brooks to defer indefinitely the recognition of income on
any repayment of his open account debt over the several years during
which the taxpayer and the S corporation made advances and repayments,
respectively.
On April 12, 2007, the Treasury Department and the IRS published a
notice of proposed rulemaking and a notice of public hearing (REG-
144859-04, 2007-20 IRB 1245) in the Federal Register (72 FR 18417)
proposing amendments to the regulations relating to the treatment of
open account debt between S corporations and their shareholders. A
public hearing on the proposed regulations was scheduled for July 31,
2007, but was cancelled because no one requested to speak. However,
comments responding to the proposed regulations were received. After
consideration of these comments, the proposed regulations are adopted
as revised by this Treasury decision. These final regulations generally
retain the provisions of the proposed regulations with the
modifications discussed in the preamble.
Summary of Comments and Explanation of Revisions
1. Need for Regulatory Change
All of the comments received in response to the proposed
regulations suggested that the regulations were overly broad and should
be withdrawn. Two commentators suggested that amending the regulations
for open account debt is not an appropriate approach for the Treasury
Department and the IRS to address concerns regarding transactions
similar to that in Brooks. Instead, the commentators asserted, such
concerns should be addressed through established judicial doctrines
such as substance over form, business purpose, sham transaction, and
economic substance. One commentator alternatively recommended a
narrowly tailored anti-abuse rule targeting open account debt instead
of broader rules that would apply to all such debt.
The Treasury Department and the IRS continue to believe that
regulatory guidance on open account debt is necessary. The Treasury
Department and the IRS believe that the treatment of open account debt
as interpreted in Brooks permits tax consequences that are inconsistent
with the original purpose of Sec. 1.1367-2 and is not conducive to
sound tax administration. Neither established judicial doctrines alone
nor a narrowly tailored anti-abuse rule suggested by the commentators
would adequately address these concerns, though the Treasury Department
and the IRS continue to
[[Page 62200]]
recognize the applicability of the judicial doctrines in appropriate
cases in addition to these final regulations.
2. Aggregate Principal Threshold Amount
The proposed regulations defined open account debt as shareholder
advances not evidenced by separate written instruments for which the
principal amount of the aggregate advances (net of repayments on
advances) did not exceed $10,000 per shareholder at the close of any
day during the S corporation's taxable year. Shareholders were required
to determine for open account debt purposes whether shareholder
advances and repayments on the advances exceeded the $10,000 aggregate
principal threshold on any day during the S corporation's taxable year.
To make such a determination, shareholders were required to maintain a
``running balance'' of shareholder advances and repayments on advances,
and the outstanding principal amount of the open account debt. If the
resulting aggregate principal of the running balance exceeded $10,000
at the close of any day during the S corporation's taxable year, the
entire principal amount of the indebtedness would no longer constitute
open account debt effective at the close of that day.
Commentators suggested that the proposed regulations' aggregate
principal threshold of $10,000 was too low for most businesses. One
commentator asserted that establishing any aggregate principal
threshold dollar amount for open account debt in final regulations
would be arbitrary and would impose a certain compliance burden on
smaller businesses. However, that commentator also suggested that
increasing the aggregate principal threshold dollar amount would
mitigate the compliance burden. The commentators suggested that if the
final regulations adopt any threshold dollar amount for open account
debt, such a threshold amount should be increased to an amount ranging
from $100,000 to $1 million.
After considering the comments on the aggregate principal threshold
dollar amount, and on recognizing customary business practices as noted
by the commentators, the Treasury Department and the IRS have concluded
that the aggregate principal threshold dollar amount for open account
debt should be increased and that other changes are necessary.
Therefore, the final regulations adopt a $25,000 aggregate principal
threshold amount per shareholder for open account debt. For example, an
S corporation with ten shareholders could receive up to $250,000 of
open account debt as long as no single shareholder advanced more than
$25,000. The Treasury Department and the IRS believe that the $25,000
threshold, together with certain other changes noted below, balances
concerns over deferral potential with normal business practices. Under
the final regulations, for any particular shareholder advances and
repayments on those advances for which, as of the specified
determination date, the aggregate principal balance exceeds the $25,000
aggregate principal threshold amount will no longer constitute open
account debt, but instead will be treated as debt evidenced by a
separate written instrument subject to the basis adjustment and
repayment accounting rules applicable to S corporation shareholder debt
generally.
As noted in the preamble to the proposed regulations, the $10,000
aggregate principal threshold amount for open account debt for purposes
of Sec. 1.1367-2 was modeled after section 7872(c)(3) and the de
minimis exception for corporation-shareholder loans in Sec. 1.7872-9
of the proposed regulations. However, the Treasury Department and the
IRS do not believe it is necessary that the threshold amount for open
account debt be modeled after the rules under Sec. 1.7872-9 regarding
corporate-shareholder loans. Nevertheless, despite the $25,000
threshold amount for open account debt in these final regulations, the
provisions under section 7872 and related regulations for corporate-
shareholder loans in excess of $10,000 separately apply to open account
debt in excess of $10,000 for each advance if the corporation is not
obligated to pay a market rate of interest on the advances.
3. Monitoring the Aggregate Principal Threshold Amount
The proposed regulations effectively required day-to-day monitoring
of open account debt. For purposes of determining compliance with the
aggregate principal threshold amount for open account debt, the
shareholder was required to maintain a daily running balance of
shareholder advances and repayments on such advances, and the
outstanding principal amount of the open account debt. Some of the
commentators suggested that the daily monitoring requirement would
impose an unreasonable burden on shareholders and recommended that the
running balance requirement be tested quarterly, annually or when the
corporation maintains and updates its other books and records. One
commentator described the practice by many closely held corporations of
reconciling and accounting only once a year and noted that only then
would such an S corporation and its shareholder(s) know what payments
are legitimately charged to the corporation as opposed to those
appropriately charged to the shareholder(s).
Another commentator suggested that with daily monitoring, a maximum
threshold rule for open account debt is too harsh for shareholders
insofar as it immediately changes the treatment of such debt the
principal balance of which exceeds the threshold by a single cent on
any day, resulting in a ``cliff'' effect. The commentator suggested
that in order to mitigate this ``cliff'' effect, the final regulations
should adopt a second prong to the aggregate principal threshold amount
test so that advances would fail to meet the definition of open account
debt only if both the aggregate principal of the running balance
exceeded the applicable aggregate principal threshold dollar amount on
any given day of the year and the balance at the end of the year
exceeded the average of the daily balances throughout the year. The
commentator provided examples of intended beneficiaries of such an
``averaging'' rule, for example, shareholders who need to advance their
S corporation more funds on a short-time basis but end the year with an
outstanding principal amount of the open account debt below the
threshold level.
After careful consideration of these comments, the Treasury
Department and the IRS have concluded that extending the period for
which a shareholder determines whether shareholder advances and
repayments exceed the aggregate principal threshold dollar amount for
open account debt would reduce both the complexity of the regulations
and any perceived burden on shareholders in making such determinations.
In addition, such a modified rule should alleviate concerns over any
potential ``cliff'' effect resulting from a day-to-day determination of
threshold amount as required in the proposed regulations. The Treasury
Department and the IRS also recognize that shareholder advances made to
an S corporation and subsequently repaid during the same taxable year
of the S corporation are not available for inclusion in the
shareholder's basis in the indebtedness for purposes of passing through
additional losses to the shareholder at the end of the taxable year.
Therefore, the final regulations do not adopt a daily determination
of whether shareholder advances and repayments on the advances exceed
the $25,000 threshold amount. Instead, the final
[[Page 62201]]
regulations provide that a determination of whether the threshold
balance of $25,000 is exceeded will be made at the end of the taxable
year of the S corporation. Under these final regulations, however, if
open account debt is disposed of in whole or in part before the end of
the S corporation's taxable year, the determination of whether the
advances and repayments have exceeded the designated aggregate
principal threshold amount must be made immediately before the
disposition of the debt during that taxable year. Moreover, if a
shareholder with open account debt is no longer a shareholder at the
end of the S corporation's taxable year, the determination must be made
immediately before the shareholder's interest in the S corporation is
terminated.
4. Character of Income/Gain Recognition
One of the commentators suggested that the final regulations
address the issue of how to characterize any income or gain that is
recognized upon repayment of both open account debt and indebtedness
evidenced by a written instrument. While recognizing the commentators'
concerns, the Treasury Department and the IRS believe that the
characterization issue is beyond the scope of these final regulations.
However, the Treasury Department and the IRS intend to continue
considering the characterization issue.
5. Effective Date Operation
The effective date in the proposed regulations provided that the
proposed rules for open account debt applied to any shareholder
advances to the S corporation made on or after the date the regulations
were published as final regulations and repayments on those advances by
the S corporation. Thus, all open account debt (net of repayments)
prior to the publication of the final regulation was outside the scope
of the proposed regulations, irrespective of the outstanding principal
amount.
One of the commentators believed that the effective date language
in the proposed regulations was subject to two interpretations. Under
the first interpretation, the rules under these final regulations (New
Rules) would apply only to open account debt created on or after the
effective date, that is, shareholder advances made on or after the
effective date and repayments on those same advances. The rules under
the prior final regulations (as contained in the 26 CFR edition revised
April 1, 2007) (Old Rules) would apply to open account debt created
before the effective date, that is, shareholder advances with respect
to pre-effective date open account debt and repayments on those prior
advances. Accordingly, a shareholder could have open account debt,
subject to the Old Rules, and open account debt, subject to the New
Rules, to which new shareholder advances and repayments on those
advances could be made after the effective date.
Under the second interpretation, a shareholder could not make
additional advances with respect to open account debt created before
the effective date but could receive repayments on that debt under the
Old Rules. Accordingly, the New Rules would apply to all shareholder
advances on and after the effective date, as well as repayments on
those advances, and the Old Rules would apply only to repayments on
pre-effective date open account debt.
The Treasury Department and the IRS intend that the rules under
these final regulations (New Rules) apply to any and all shareholder
advances made on and after the effective date. The rules under these
final regulations (New Rules) also apply to repayments on such
advances. However, if a shareholder has open account debt (net of prior
repayments in the taxable year) outstanding prior to the effective date
of these final regulations, the rules under the prior final regulations
(Old Rules) apply to any repayments on such pre-effective date open
account debt. Accordingly, that pre-effective date open account debt
will not be subject to any aggregate principal threshold dollar amount.
The shareholder may not make additional advances with respect to the
pre-effective date open account debt (because all shareholder advances
made on or after the effective date of these final regulations
constitute new open account debt subject to these final regulations).
For instance, assume that the effective date of these final
regulations falls within the taxable year of shareholder A's S
corporation. Also assume that, at the beginning of the S corporation's
taxable year, A will have existing open account debt with an
outstanding principal balance of $12,000. Assume further that A will
make an additional advance of $3,000 to and will receive a $2,000
repayment from his S corporation prior to the effective date. Thus, as
of the effective date, A will have existing open account debt with an
outstanding principal balance of $13,000 (A would net the pre-effective
date advance and repayment for the taxable year and combine that net
advance of $1,000 with the $12,000 outstanding aggregate principal
balance of the then existing open account debt). This $13,000 pre-
effective date open account debt would not be subject to these final
regulations and, thus, would not be subject to any aggregate principal
threshold dollar amount and would be repaid under the rules of the
prior final regulations. If, on or after the effective date of these
final regulations, A were to both make an advance of $5,000 to his S
corporation and receive a $1,000 repayment on that advance, the advance
and repayment would constitute separate new open account debt subject
to the rules under these final regulations.
Shareholders also have the option to apply these rules to
shareholder advances to the S corporation and repayments on those
advances by the S corporation made before the effective date of these
regulations. Using the example above, A would have the option to net
the $5,000 advance and $1,000 repayment.
Effective/Applicability Date
The regulations apply to any and all shareholder advances to the S
corporation made on or after October 20, 2008, and repayments on those
advances by the S corporation.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. Because these
regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking that preceded these regulations was submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business.
Drafting Information
The principal authors of these final regulations are Stacy L. Short
and Deane M. Burke of the Office of the Associate Chief Counsel
(Passthroughs and Special Industries). However, other personnel from
the IRS and the Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
[[Page 62202]]
Adoption of Amendments to the Regulations
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Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
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Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1367-2 also issued under 26 U.S.C. 1367(b)(2). * * *
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Par. 2. Section 1.1367-2 is amended as follows:
0
1. Paragraph (a) is revised. paragraph (a)(2) is added.
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2. Paragraphs (c)(2) and (d)(1) are revised.
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3. Paragraph (d)(2) is redesignated as paragraph (d)(3) and new
paragraph (d)(2) is added.
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4. Paragraph (e) is amended by adding Examples 6, 7 and 8.
The revisions and additions read as follows:
Sec. 1.1367-2 Adjustments to basis of indebtedness to shareholder.
(a) In general--(1) Adjustments under section 1367. This section
provides rules relating to adjustments required by subchapter S to the
basis of indebtedness (including open account debt as described in
paragraph (a)(2) of this section) of an S corporation to a shareholder.
The basis of indebtedness of the S corporation to a shareholder is
reduced as provided in paragraph (b) of this section and restored as
provided in paragraph (c) of this section in accordance with the timing
rules in paragraph (d) of this section.
(2) Open Account Debt--(i) General rule. The term open account debt
means shareholder advances not evidenced by separate written
instruments and repayments on the advances, the aggregate outstanding
principal of which does not exceed $25,000 of indebtedness of the S
corporation to the shareholder at the close of the S corporation's
taxable year. Advances and repayments on open account debt are treated
as a single indebtedness.
(ii) Exception. If the shareholder advances not evidenced by a
separate written instrument, net of repayments, exceeds an aggregate
outstanding principal amount of $25,000 at the close of the S
corporation's taxable year, for any subsequent taxable year the
aggregate principal amount of that indebtedness is treated in the same
manner as indebtedness evidenced by a separate written instrument for
purposes of this section. For any subsequent taxable year, that
indebtedness is not open account debt and is subject to all basis
adjustment rules applicable to basis of indebtedness of an S
corporation to a shareholder in this section.
* * * * *
(c) * * *
(2) Multiple indebtedness. If a shareholder holds more than one
indebtedness (including any open account debt and any debt treated as a
single indebtedness under paragraph (a)(2)(ii) of this section) as of
the beginning of an S corporation's taxable year, any net increase is
applied first to restore the reduction of basis in any indebtedness
repaid (in whole or in part) in that taxable year to the extent
necessary to offset any gain that would otherwise be realized on the
repayment. Any remaining net increase is applied to restore each
outstanding indebtedness (including any open account debt and any debt
treated as a single indebtedness under paragraph (a)(2)(ii) of this
section) in proportion to the amount that the basis of each outstanding
indebtedness has been reduced under section 1367(b)(2)(A) and paragraph
(b) of this section and not restored under section 1367(b)(2)(B) and
this paragraph (c).
(d) Time at which adjustments to basis of indebtedness are
effective--
(1) In general. The amounts of the adjustments to basis of
indebtedness (including open account debt) provided in section
1367(b)(2) and this section are determined as of the close of the S
corporation's taxable year, and the adjustments are generally effective
as of the close of the S corporation's taxable year. However, if the
shareholder is not a shareholder in the S corporation at that time,
these adjustments are effective immediately before the shareholder
terminates his or her interest in the S corporation. Except as provided
in paragraph (d)(2) of this section, if a debt is disposed of or repaid
in whole or in part before the close of the taxable year, the basis of
that indebtedness is restored under paragraph (c) of this section,
effective immediately before the disposition or the first repayment on
the debt during the taxable year. To the extent any indebtedness of the
S corporation to the shareholder is disposed of or repaid (in whole or
in part) during the taxable year and the shareholder's basis in that
indebtedness has been reduced under paragraph (b) of this section and
is not restored completely under paragraph (c) of this section, the
disposition or repayment is a recognition event effective immediately
before the indebtedness is disposed of or repaid (in whole or in part).
(2) Open account debt--(i) In general. All advances and repayments
on open account debt (as described in paragraph (a)(2)(i) of this
section) during the S corporation's taxable year are netted at the
close of the S corporation's taxable year to determine the amount of
any net advance or net repayment. The net advance or net repayment is
combined with the outstanding aggregate principal balance of the
existing open account debt and that amount is carried forward to the
beginning of the subsequent taxable year as the outstanding aggregate
principal amount of the open account debt (unless the aggregate
principal amount meets the exception defined in paragraph (a)(2)(ii) of
this section at the close of the taxable year). However, if the
shareholder in the S corporation is not a shareholder of the S
corporation at the close of the S corporation's taxable year, such
advances and repayments on open account debt are netted, and the basis
of that indebtedness is restored under paragraph (c) of this section,
effective immediately before the shareholder terminates his or her
interest in the S corporation. If any open account debt is disposed of
before or upon the close of the taxable year, the disposition is
effective at the close of the S corporation's taxable year, and all
advances and repayments are netted immediately prior to the disposition
and the basis of that indebtedness is restored under paragraph (c) of
this section, effective at the close of the S corporation's taxable
year.
(ii) Exception. Shareholder indebtedness that is open account debt
at the beginning of the taxable year but meets the exception defined in
paragraph (a)(2)(ii) of this section at the close of the taxable year,
adjustments to the basis of the indebtedness for that taxable year
follow the provisions for open account debt. The resulting aggregate
principal amount of indebtedness is treated as the principal amount of
a debt evidenced by a separate written instrument for any subsequent
taxable year, and is no longer subject to the open account debt
provisions of this section.
* * * * *
(e) * * *
Example 6. The $25,000 Aggregate Principal Amount Applies to
Each Shareholder. (i) A and B have been the two shareholders in
Corporation S since 2000. As of the end of the 2008 taxable year,
the bases of A's and B's stock are both zero. On June 1, 2009, A
advances S $16,000, which is not evidenced by a written instrument.
On August 1, 2009, B advances S $22,000, which
[[Page 62203]]
is not evidenced by a written instrument. Both the $16,000 advance
and the $22,000 advance are open account debt and remain outstanding
at those amounts during 2009. There is no net increase under
paragraph (c) of this section in year 2009.
(ii) At the close of the 2009 taxable year, A's open account
debt does not exceed $25,000. A therefore carries forward to the
beginning of the 2010 taxable year the $16,000 as open account debt.
(iii) At the close of the 2009 taxable year, B's open account
debt does not exceed $25,000. B therefore carries forward to the
beginning of the 2010 taxable year the $22,000 as open account debt.
Example 7. Treatment of open account debt. (i) The facts are the
same as in Example 6, in addition to which, on December 31, 2009,
A's basis in the open account debt is reduced under paragraph (b) of
this section to $8,000. On April 1, 2010, S repays A $4,000 of the
open account indebtedness. On September 1, 2010, A advances S an
additional $1,000, which is not evidenced by a written instrument.
There is no net increase under paragraph (c) of this section in year
2010.
(ii) The $4,000 April repayment S makes to A and A's $1,000
September advance are netted to result in a net repayment of $3,000
for the taxable year on A's $16,000 open account debt carried
forward from 2009. Because there is no net increase in 2010, no
basis of indebtedness is restored for the 2010 taxable year, and A
realizes $1,500 of income on the $3,000 net repayment at the close
of the 2010 taxable year.
(iii) At close of the 2010 taxable year, A's open account debt
does not exceed $25,000. The net repayment of $3,000 for the taxable
year on A's $16,000 open account debt carried forward from 2009,
leaves A with an open account debt of $13,000 to carry forward as
open account debt to the beginning of the 2011 taxable year.
Example 8. Treatment of shareholder indebtedness not evidenced
by a written instrument which exceeds $25,000. (i) The facts are the
same as in Example 7, in addition to which, on February 1, 2011, S
repays $5,000 of the open account debt and on March 1, 2011, A
advances S $20,000, which is not evidenced by a written instrument.
(ii) At the close of the 2010 taxable year, A has an open
account debt of $13,000 to carry forward as open account debt to the
beginning of the 2011 taxable year.
(iii) The 2011 advances and repayments are netted to result in a
net advance of $15,000 on A's $13,000 open account debt carried
forward from 2010, increasing A's open account debt to $28,000 as of
the close of the 2011 taxable year. Because A's open account debt
exceeds $25,000, for any subsequent taxable year the $28,000
indebtedness will be treated in the same manner as indebtedness
evidenced by a separate written instrument for the purposes of this
section. Because there is no net increase in 2011, no basis of
indebtedness is restored for the 2011 taxable year.
0
Par. 3. Section 1.1367-3 is revised to read as follows:
Sec. 1.1367-3 Effective/Applicability date.
Section 1.1367-2(a), (c)(2), (d)(2), and (e) Example 6, Example 7,
and Example 8 apply to any shareholder advances to the S corporation
made on or after October 20, 2008 and repayments on those advances by
the S corporation. The rules that apply with respect to shareholder
advances to the S corporation made before October 20, 2008, are
contained in Sec. 1.1367-3 in effect prior to October 20, 2008. (See
26 CFR part 1 revised as of April 1, 2007.) Shareholders have the
option to apply these rules to shareholder advances to the S
corporation made before October 20, 2008, and repayments on those
advances by the S corporation.
Approved: September 25, 2008.
Linda E. Stuff,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-24926 Filed 10-17-08; 8:45 am]
BILLING CODE 4830-01-P