AICPA tax division works to modernize subchapter S.

• Author: Woehlke, James A.

The AICPA Tax Division is deeply involved in developing a comprehensive proposal to modernize subchapter S of the Internal Revenue Code. Beginning in mid-1992, the AICPA Tax Division joined with the U.S. Chamber of Commerce's Taxation Committee and representatives of the American Bar Association (ABA) Tax Section's S Corporation Committee to work on a comprehensive list of proposals. The legislative package that resulted from the group's effort contains 26 proposed changes to subchapter S.

Official AICPA endorsement of the subchapter S modernization package occurred with the Tax Executive Committee's approval on Nov. 20, 1992. In addition to the U.S. Chamber and the ABA's S Corporation Committee, a number of other organizations have been supportive of our efforts to modernize subchapter S, including the National Federation of Independent Business, the National Association of Private Enterprise, and the Small Business Legislative Council.

Background to subchapter S modernization

Subchapter S was last overhauled in 1982 after a similar effort on the part of the AICPA, members of the American Bar Association's Section of Taxation, and the staff of the joint Committee on Taxation. The Subchapter S Revision Act of 1982 substantially revised subchapter S to remove many of its traps and some of its obsolete restrictions. Subsequently, changes made in the Tax Reform Act of 1986 made the election of subchapter S treatment highly desirable to many small businesses. Today, over 1.5 million small businesses (42% of corporate tax return filers) are S corporations.(1)

All the current interest in subchapter S springs from the conviction that the subchapter should be amended to better reflect the way small business does business in the '90s. Many of the prohibitive restraints currently in subchapter S date back to its original enactment in 1958. The financial environment in the 1990s is far more complex than it was 35 years ago, and 1950s legislative restraints are handicapping small business. A '90s small business does not operate the way a '50s small business did. Times (and financial transactions) were simpler then. Subchapter S requires a fresh 1990s outlook.

For instance, with the traditional sources of debt financing--commercial banks--presently restricting their loans to small business, these businesses have had to turn to nontraditional sources of financing (such as venture capitalists and pension funds). Typically, these sources of financing want...