The American Institute of CPAs (AICPA) has asked the IRS to clarify its recent no-rule policy concerning S corporations.
The organization has made three specific requests to the IRS:
- Ensure that the no-rule policy doesn’t become too broad
- Define and publish the parameters of the policy
- Issue an official advisory clarifying on which S corporation issues the IRS will not rule
According to the AICPA’s May 2 letter to the IRS, an IRS official from the agency’s Office of Associate Chief Counsel (Passthroughs and Special Industries) described a no-rule policy on three S corporation issues during a March tax law conference.
The official cited limited IRS resources and a need for changes in how the agency rules as a result of concerns over the correctness and inherent value of various private letter rulings issued in the three areas, the AICPA letter states.
The three issues relate to:
- Disproportionate distributions made by a corporation and whether those distributions caused the corporation to have more than one class of stock when the distributions weren’t made pursuant to a governing provision.
- Whether an instrument, obligation, arrangement or agreement causes the treatment of a corporation as having more than one class of stock when this result would only occur when a principal purpose of the instrument, obligation, arrangement or agreement is to circumvent the one class of stock requirement.
- Procedural defects in an election under subchapter S, including an S election, a qualified subchapter S subsidiary election, a qualified subchapter S trust election, and an electing small-business trust election.
The IRS official, who the letter does not identify, also said that the no-rule policy may be expanded “as issues are raised that the IRS views as ‘comfort rulings’ or rulings that are not providing protection to taxpayers,” according to the AICPA letter.
“The IRS’s private letter ruling process serves a vital function for many taxpayers, especially S corporations,” wrote Annette Nellen, CPA, CGMA, Esq., chair of the AICPA Tax Executive Committee, in the letter. “With the new informal no-rule policy, many S corporation taxpayers are left without an avenue to remedy various issues that are specifically unique to S corporations.
The AICPA requests that any official advisory from the IRS include the following parameters:
- The omission of certain information or the provision of erroneous information, not critical to the making of a valid election under subchapter S, doesn’t invalidate an election
- Proper consent to an election under subchapter S, where full and proper consent was intended and eventually secured, doesn’t invalidate an election
- Guidance on the effect of having made disproportionate distributions that violate the governing instruments
- The IRS will not challenge the validity of an S election based on a missing officer’s consent or a missing shareholder’s consent
- An automatic waiver of an inadvertent, invalid or terminated S election is available for a limited liability company (LLC)
- The varying interest distribution allowance will expand consistent with prior letter rulings
The AICPA also wants the IRS to issue official announcements if the agency identifies other S corporation qualification issues for which it won’t issue private letter rulings.
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.