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Tax Announcements New Proposed Regulations May Impact Shareholder Basis for Indebtedness. In response to the Brooks case (TC Memo 2005-204) the IRS has proposed new regulations to narrow the definition of open account debt and modify the rules for adjusting basis in shareholder indebtedness. The new regulations are an attempt to prevent abusive behavior from shareholders who fund corporate debt in order to utilize current losses and subsequently repay the debt in a short time span. Under the new regulations, open account debt would be defined as shareholder advances not evidenced by separate written instruments for which the principal amount of the aggregate advances (net of repayments of the advances) does not exceed $10,000 at the close of any day during the S corporation tax year. Open account debt would be treated as a single debt. A running balance of the advances and repayments and the outstanding principal would have to be maintained on a debt by debt basis. Any repayments could trigger capital gain income to the shareholder. If the running balance does not exceed $10,000 at the close of any day during the S Corporation’s tax year, the advances and repayments would remain open account debt, treated as a single debt, and accounted for at the close of the tax year, as is the practice under current law. As of December 31, 2007 these regulations were still in proposal form, however, final regulations should be forthcoming sometime in 2008. Beason & Nalley will keep you posted of any changes to these new proposed regulations as they become available. Careful planning should be considered for shareholder indebtedness during 2008 as well as in future years. Please contact our office for further guidance in this area. Also see: |
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