[Federal Register: April 12, 2007 (Volume 72, Number 70)]
[Proposed Rules]
[Page 18417-18422]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12ap07-26]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-144859-04]
RIN 1545-BD72
Section 1367 Regarding Open Account Debt
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document proposes amendments to the regulations relating
to the treatment of open account debt between S corporations and their
shareholders. These proposed 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 proposed
regulations affect shareholders of S corporations and are necessary to
provide guidance needed to comply with the applicable tax law. This
document also provides notice of a public hearing.
DATES: Written or electronic comments and requests for a public hearing
must be received by July 11, 2007. Outlines of topics to be discussed
at the public hearing scheduled for July 31, 2007, at 10 a.m., must be
received by July 10, 2007.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-144859-04), room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions also may be hand-delivered Monday
through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR
(REG-144859-04), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington, DC, or sent electronically, via
[[Page 18418]]
http://www.regulations.gov (IRS REG-144859-04). The public hearing will be
held in the IRS Auditorium, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Stacy L. Short or Deane M. Burke, (202) 622-3070; concerning
submissions of comments, the hearing, and/or to be placed on the
building access list to attend the hearing, Richard Hurst at (202) 622-
2949 (TDD Telephone) (not toll free numbers) and his e-mail address is
Richard.A.Hurst@irscounsel.treas.gov, (202) 622-7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507). Comments on the collections of information should be sent
to the Office of Management and Budget, Attention: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attention: IRS Reports Clearance Officer, T:FP, Washington, DC
20224.
The recordkeeping requirement in these proposed regulations is in
Sec. 1.1367-2(a)(2)(i). This information must be maintained by the
shareholder to ensure that the indebtedness of the S corporation to the
shareholder continues to meet the definition of open account debt found
in Sec. 1.1367-2(a)(2)(i). The recordkeepers will be S corporation
shareholders who have open account debt.
The following estimates are an approximation of the average time
expected to be necessary for a collection of information. They are
based on the information that is available to the Internal Revenue
Service. Individual recordkeepers may require greater or less time,
depending on their particular circumstances.
Estimated total annual recordkeeping burden: 250 hours.
Estimated average annual burden: Hours per recordkeeper varies from
.75 to 1.25 hours, depending on individual circumstances, with an
estimated average of 1 hour.
Estimated number of recordkeepers: 250.
Estimated annual frequency of recordkeeping: On occasion.
Background
This document proposes to amend 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 pro rata share of
distributions not includible in income of the shareholder by reason of
section 1368 (nontaxable distributions), losses and deductions
(separately and non-separately 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. Further, Sec. 1.1367-2(a) provides
that the basis of indebtedness of the S corporation to a shareholder is
reduced as provided in Sec. 1.1367-2(b) and restored as provided in
Sec. 1.1367-2(c). Thus, 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.
Section 1.1367-2(b) provides the rules for the reduction of basis
of indebtedness of an S corporation to a shareholder. Generally, under
Sec. 1.1367-2(b)(1), if the basis of a shareholder's stock in the S
corporation has been reduced to zero under section 1367(a)(2), the
excess of certain losses and deductions specified in section 1367(a)(2)
is applied to reduce (but not below zero) the basis of any indebtedness
of the S corporation to the shareholder held by the shareholder at the
close of the S corporation's taxable year. Any indebtedness of the S
corporation to the shareholder that has been satisfied by the S
corporation, or disposed of or forgiven by the shareholder during the
taxable year, is not held by the shareholder at the close of that year
and is not subject to basis reduction. Further, Sec. 1.1367-2(b)(2)
provides that if the interest of the shareholder in the S corporation
is terminated during the taxable year, the rules in Sec. 1.1367-2(b)
are applied to any indebtedness of the S corporation to the shareholder
held by the shareholder immediately before the termination of the
shareholder's interest in the S corporation. If a shareholder holds
more than one indebtedness at the close of the taxable year (or, if
applicable, immediately prior to the termination of the shareholder's
interest in the corporation), the basis of each indebtedness is reduced
under Sec. 1.1367-2(b)(3) in the same proportion that the basis of
each indebtedness bears to the aggregate bases of the indebtedness of
the S corporation to the shareholder.
Section 1.1367-2(c) provides the rules for restoring basis of
indebtedness of an S corporation to a shareholder. Generally, under
Sec. 1.1367-2(c)(1), if, for any taxable year of the S corporation,
there has been a reduction in the basis of an indebtedness of the S
corporation to a shareholder, any net increase in any subsequent
taxable year of the S corporation is applied to restore that reduction.
For purposes of Sec. 1.1367-2, a
[[Page 18419]]
net increase is the amount by which the shareholder's pro rata share of
S corporation items described in section 1367(a)(1) exceed the items
described in section 1367(a)(2) for the taxable year. The restoration
rules apply only to indebtedness held by the shareholder as of the
beginning of the taxable year in which the net increase arises.
Further, the reduction in basis of indebtedness must be restored before
a net increase is used to restore the shareholder's basis in stock. The
shareholder's basis in indebtedness may not be restored above the
adjusted basis of the indebtedness under section 1016(a) (excluding any
prior year's adjustments under section 1367), determined as of the
beginning of the taxable year in which the net increase arises.
Under Sec. 1.1367-2(c)(2), if a shareholder holds more than one
indebtedness 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 in proportion to the amount that
the basis of each outstanding indebtedness has been reduced and not
restored.
Section 1.1367-2(d) provides rules for the time at which
adjustments to basis of indebtedness under section 1367(b)(2) are
effective. Generally, under Sec. 1.1367-2(d)(1) the amount of the
adjustments to basis of indebtedness are determined and effective as of
the close of an S corporation's taxable year. However, if the
shareholder is not a shareholder in the S corporation at that time, the
adjustments are effective immediately before the shareholder's interest
in the S corporation is terminated. Moreover, if a debt is disposed of
or repaid, in whole or in part, before the close of the taxable year,
the basis of that debt is restored effective immediately before the
disposition or the first repayment on the debt during the taxable year.
On August 25, 2005, the Tax Court issued its decision in Brooks v.
Commissioner, TC Memo. 2005-204. In Brooks, the taxpayer borrowed money
from a bank and advanced that money as open account debt to his S
corporation in one taxable year and reduced basis in that open account
debt for losses passed through to the taxpayer at the end of that same
year. In the first few weeks of the subsequent taxable year, the S
corporation repaid the open account debt (the taxpayer then repaid his
debt for the borrowed money). Late in that subsequent year, the
taxpayer advanced additional money (again, amounts borrowed from a
bank) in an amount that offset the repayment of advances to avoid the
recognition of gain from repayment of the indebtedness. Also, the
taxpayer's advances increased the shareholder's basis in the
indebtedness and allowed losses for that year to pass through to the
taxpayer shareholder. Taxpayer and the S corporation made these
repayments and advances for several taxable years and deferred
indefinitely the recognition of income on any repayment of his open
account debt.
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.''
Explanation of Provisions
The Treasury Department and the IRS believe that the concept of
``open account debt'' as defined in Sec. 1.1367-2(a) was intended to
provide administrative simplicity for S corporations but was not
intended to permit the deferral allowed in Brooks. The IRS and Treasury
Department are proposing these amendments to narrow the definition of
open account debt and to modify the rules for adjustments of basis in
indebtedness for the more narrowly defined open account debt.
In these proposed regulations, open account debt is defined as
shareholder advances not evidenced by separate written instruments for
which the principal amount of the aggregate advances (net of repayments
on the advances) does not exceed $10,000 at the close of any day during
the S corporation's taxable year. Included within that definition are
separate advances under a line of credit agreement if the advances are
not evidenced by a separate written instrument. Open account debt is
treated as a single indebtedness. This $10,000 limitation on open
account debt for the purposes of the Sec. 1.1367-2 regulations is
modeled after section 7872(c)(3) and the Sec. 1.7872-9 proposed
regulations, which provide a $10,000 de minimis exception to the
treatment of loans with below-market interest rates for compensation-
related or corporation-shareholder loans.
Under these proposed regulations, to determine whether shareholder
advances and repayments on the advances exceed the $10,000 aggregate
principal threshold on any day during the S corporation's taxable year
for open account debt, the shareholder will have to maintain a
``running balance'' of those advances and repayments, and the
outstanding principal amount of the open account debt. If the resulting
aggregate principal of the running balance does not exceed $10,000 at
the close of any day during the S corporation's taxable year, the
advances and repayments on advances would constitute open account debt,
would be treated as a single indebtedness, and would be accounted for
at the close of the taxable year (as explained in this preamble).
However, if the resulting aggregate principal of the running balance
exceeds $10,000 at the close of any day during the S corporation's
taxable year, the entire principal amount of that indebtedness would no
longer constitute open account debt effective at the close of the day
on the date the amount of the running balance exceeds $10,000. This
principal amount would be treated as indebtedness evidenced by a
written instrument for that taxable year, and would be accounted for
according to the timing rules in Sec. 1.1367-2(d) for that taxable
year and subsequent taxable years. Any new shareholder advances not
evidenced by a written instrument and repayments on those advances
within the $10,000 aggregate principal threshold amount during the
taxable year would constitute a new open account debt.
The proposed regulations also modify the manner in which repayments
on open account debt are accounted for under the existing final Sec.
1.1367-2 regulations. These rules are separate from the maintenance of
a running balance of the advances and repayments to determine if a
shareholder has exceeded the $10,000 threshold amount. For purposes of
accounting for open account debt, each shareholder, at the end of the S
corporation's taxable year, must determine if that shareholder has made
a net advance or received a net repayment on open account debt for that
taxable year. To determine if a net advance or a net repayment has
occurred, each shareholder, at the end of the S corporation's taxable
year, must net all advances and repayments made during the year without
regard to the outstanding principal amount of the open account debt.
If, at the end of the taxable year, a net repayment exists, the net
repayment must be taken into account effective at the close of the S
corporation's taxable year under the general basis adjustment rules in
the existing final Sec. 1.1367-2 regulations. If, at the end of the
taxable year, a net advance exists, the net advance is combined with
the outstanding
[[Page 18420]]
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. If at any time during the taxable year the resulting aggregate
principal of the running balance exceeds the $10,000 threshold amount
so the entire principal amount of the indebtedness no longer
constitutes open account debt, the running balance must be reconciled
effective at the close of the day the balance exceeds $10,000 to
determine the aggregate principal amount of the indebtedness, and for
the remainder of the taxable year that principal amount is treated in
the same manner as indebtedness evidenced by a written instrument for
the purposes of this section.
Proposed Effective Date
The regulations, as proposed, apply to any shareholder advances to
the S corporation made on or after the date of publication of a
Treasury decision adopting these rules as final regulations in the
Federal Register and repayments on those advances by the S corporation.
Special Analyses
It has been determined that this notice of proposed rulemaking 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, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) or electronic comments that are submitted timely
to the IRS. The IRS and the Treasury Department request comments on the
clarity of the proposed rules and how they can be made easier to
understand. All comments will be available for public inspection and
copying.
A public hearing has been scheduled for July 31, 2007, beginning at
10 a.m. in the IRS Auditorium, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance. In
addition, all visitors must present photo identification to enter the
building. Because of access restrictions, visitors will not be admitted
beyond the immediate entrance area more than 30 minutes before the
hearing starts. For information about having your name placed on the
building access list to attend the hearing, see the ``FOR FURTHER
INFORMATION CONTACT'' section of this preamble.
The rules of 26 CFR 606.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit electronic or
written comments and an outline of the topics to be discussed and time
to be devoted to each topic (a signed original and eight (8) copies) by
July 10, 2007. A period of 10 minutes will be allotted to each person
for making comments. An agenda showing the scheduling of the speakers
will be prepared after the deadline for receiving outlines has passed.
Copies of the agenda will be available free of charge at the hearing.
Drafting Information
The principal authors of these regulations are Stacy L. Short and
Deane M. Burke of the Office of the Associate Chief Counsel
(Passthroughs and Special Industries), IRS.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAX
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order 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). * * *
>Par. 2. Section 1.1367-2 is amended as follows:
1. Paragraph (a) is revised.
2. Paragraphs (c)(2) and (d)(1) are revised.
3. Paragraph (d)(2) is redesignated as paragraph (d)(3).
4. New paragraph (d)(2) is added.
5. Paragraph (e) is amended by adding Examples 6 and 7.
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 $10,000 of indebtedness of the S
corporation to the shareholder at the close of any day during the S
corporation's taxable year. Advances and repayments on open account
debt are treated as a single indebtedness. For purposes of determining
if shareholder advances not evidenced by separate written instruments
and repayments on those advances exceed an aggregate outstanding
principal of $10,000, a shareholder must maintain a running daily
balance of all advances and repayments on those advances and the
outstanding principal amount of the open account debt at the close of
each day during the S corporation's taxable year.
(ii) Exception. If a shareholder's running balance exceeds an
aggregate outstanding principal amount of $10,000 at the close of any
day during the S corporation's taxable year, effective on the close of
the day on which the shareholder's running balance exceeds $10,000, the
running balance must be reconciled to determine the aggregate principal
amount of indebtedness. For the remainder of the taxable year, that
aggregate principal amount of indebtedness is treated in the same
manner as indebtedness evidenced by a separate written instrument for
purposes of this section. For the remainder of that taxable year and
subsequent taxable years, the 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) * * * (1) * * *
(2) Multiple indebtedness. If a shareholder holds more than one
[[Page 18421]]
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. Except as provided in paragraph (d)(2) of
this section, the amounts of the adjustments to basis of indebtedness
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. If a debt (including any open account debt and any debt
treated as a single indebtedness under paragraph (a)(2)(ii) of this
section) 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 (or the net repayment on
open account debt) during the taxable year. To the extent any reduction
of basis in indebtedness under paragraph (b) of this section that is
disposed of or repaid (in whole or in part) during the taxable year is
not restored completely under paragraph (c) of this section, gain is
realized on the repayment 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 taxable year are netted continuously as the
advances and repayments occur. The amount of any net advance or net
repayment on open account debt for the S corporation's taxable year is
determined at the close of the taxable year. If the shareholder
advances, and repayments on the advances, during the S corporation's
taxable year result in a net advance or net repayment, the basis of the
open account debt is reduced as provided in paragraph (b) of this
section and restored as provided in paragraph (c) of this section
effective at the close of the taxable year. To the extent any reduction
of basis of open account debt under paragraph (b) of this section that
is disposed of or repaid (in whole or in part) during the taxable year
is not restored completely under paragraph (c) of this section, income
is realized on the net repayment at the close of the taxable year in
which the open account debt is disposed of or repaid (in whole or in
part).
(ii) Exception. On the close of the day on which the shareholder's
running balance exceeds an aggregate outstanding principal amount of
$10,000, the shareholder's running balance is reconciled to determine
an aggregate principal amount of indebtedness. The resulting aggregate
principal amount of indebtedness is treated as the principal amount of
a debt evidenced by a separate written instrument for the remainder of
that taxable year and any subsequent taxable year, and is no longer
subject to the open account debt provisions of this section.
* * * * *
(e) * * *
* * * * *
Example 6. Treatment of open account debt. (i) A has been the
sole shareholder in Corporation S since 2000. In 2007, A advances S
$8,000, which is not evidenced by a written instrument. The $8,000
advance is open account debt and remains outstanding at that amount
during 2007. On December 31, 2007, the basis of A's stock is zero;
and the basis of the open account debt is reduced under paragraph
(b) of this section to $4,000. On April 1, 2008, S repays $3,000 of
the open account indebtedness. On September 1, 2008, A advances S an
additional $2,000, which is not evidenced by a written instrument.
There is no net increase under paragraph (c) of this section in year
2007 or 2008.
(ii) At no time during the 2007 taxable year does the running
balance of A's open account debt exceed $10,000. As of December 31,
2007, A's basis in the open account debt is reduced under paragraph
(b) of this section to $4,000.
(iii) At no time during the 2008 taxable year does the running
balance of A's open account debt exceed $10,000. On April 1, 2008,
S's $3,000 repayment is applied to A's running balance for open
account debt carried forward from 2007 in the amount of $8,000 to
reduce the running balance to $5,000. On September 1, 2008, A's
advance to S of $2,000, which is not evidenced by a written
instrument, is applied to A's running balance to bring A's aggregate
outstanding principal on A's open account indebtedness to $7,000.
(iv) At the close of the 2008 taxable year, the $3,000 April
repayment S makes to A and A's $2,000 September advance are netted
to result in a net repayment of $1,000 for the taxable year on A's
$8,000 open account debt carried forward from 2007. Because there is
no net increase in 2008, no basis of indebtedness is restored for
the 2008 taxable year.
Example 7. Treatment of shareholder indebtedness not evidenced
by a written instrument which exceeds $10,000. (i) The facts are the
same as in Example 6, in addition to which, on February 1, 2008, S
repays $1,000 of the open account debt and on March 1, 2008, A
advances S $5,000, which is not evidenced by a written instrument.
(ii) At no time during the 2007 taxable year does the running
balance of A's open account debt exceed $10,000. As of December 31,
2007, the basis of the open account debt is reduced under paragraph
(b) of this section to $4,000.
(iii) The running balance of A's open account debt does exceed
$10,000 during the 2008 taxable year. On February 1, 2008, S's
$1,000 repayment is applied to A's running balance for open account
debt carried forward from 2007 in the amount of $8,000 to reduce the
running balance to $7,000. On March 1, 2008, A's advance to S of
$5,000, which is not evidenced by a written instrument, is applied
to A's running balance to bring A's aggregate outstanding principal
on A's open account debt to $12,000. Because this amount exceeds the
$10,000 threshold amount, effective at the close of the day on March
1, 2008, A's running balance must be reconciled to determine an
aggregate principal amount of indebtedness.
(iv) As of March 1, 2008, S had made a $1,000 repayment on A's
open account debt, and A had advanced an additional $5,000 which was
not evidenced by a written instrument. To reconcile A's running
balance, the $1,000 repayment and $5,000 advance are netted first to
result in a $4,000 net advance that is then added with A's existing
principal amount of open account debt of $8,000 to determine the
aggregate principal amount of indebtedness of $12,000. As of March
1, 2008, S's indebtedness to A that is not evidenced by a written
instrument has a principal balance of $12,000 and a basis of $8,000
($4,000 basis on December 31, 2007 + $4,000 net advance). On April
1, 2008, S repays $3,000 of that new indebtedness.
(v) On September 1, 2008, A advances S an additional $2,000,
which is not evidenced by a written instrument. The $2,000 advance
is considered new open account debt. On December 31, 2008, A's basis
in his stock is zero and the outstanding principal in the two
remaining debts are as follows:
[[Page 18422]]
----------------------------------------------------------------------------------------------------------------
3/1/08 4/1/08 9/1/08 12/31/08
principal repayment advance principal
----------------------------------------------------------------------------------------------------------------
Indebtedness treated as if evidenced by written instrument.. $12,000 $3,000 ........... $9,000
Open account debt........................................... ........... ........... $2,000 2,000
----------------------------------------------------------------------------------------------------------------
Par. 3. Section 1.1367-3 is amended as follows:
1. The section heading is revised.
2. The first sentence of the paragraph is revised.
3. A new second and last sentence are added.
The revisions and additions read as follows:
Sec. 1.1367-3 Effective dates and transitional rules.
Section 1.1367-2(a), (c)(2), (d)(2), and (e) Example 6 and Example
7 apply to any shareholder advances to the S corporation made on or
after the date these regulations are published as final regulations in
the Federal Register and repayments on those advances by the S
corporation.
Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E7-6764 Filed 4-11-07; 8:45 am]
BILLING CODE 4830-01-P