IRS finalizes basis and distribution regulations for S corporations.

• Author: Starr, Samuel P.
• Position: Brief Article

The IRS recently released final regulations under Secs. 1367 and 1368 addressing the tax trcatment of basis adjustments and distributions for S corporations. For the most part, these regulations adopt the concepts contained in earlier proposed regulations. In a few cases, however, the new regulations provide more liberalized positions. Some of the most important changes made in thc final regulations follow.

* If elected, basis will be reduced first by dcductible items before basis is applied to nondeductible items (this reverses the proposed regulations) (Regs. Sec. 1.13671(e)). Howcver, if the election is made, nondeductible items in cxcess of basis are suspended and will apply against basis when it is established.

* Open account debt is to be aggregated (i.e., treated as a single debt) for purposes of dealing with basis (Regs. Sec.1.1367-2(a)).

* The proposed regulations allowed a closing of the books for income allocation purposes when a shareholder disposed of 20% or more of its stock. Regs. Sec. 1.1368-1(g) makes it clear that such an election is allowed...