The infamous Charge of the Light Brigade as immortalized by Alfred, Lord Tennyson was an ill-advised charge of British cavalrymen on October 25, 1854, at the Battle of Balaclava during the Crimean War. The Brigade was erroneously led into the wrong area of battle due to imprecise orders. Often tax practitioners and taxpayers have a quite similar feeling as the 600+ men of the Light Brigade. Just as their battle plan was hindered by imprecise orders, CPAs are hindered by imprecise instructions, vague guidelines, dangling participles and unfocused legalese included with many forms and regulations.
From as far back as December 2009 (“Tax GAP – Actions Needed to Address Noncompliance with S Corporation Tax Rules,” GAO-10-195, December 2009), GAO developed options for improving compliance with S corporation rules by recommending that corporations be required to maintain shareholder basis calculations at the entity level. Practitioners quickly noted several flies in the ointment of the 2009 GAO proposal:
- The corporation would not typically have a shareholder’s initial basis, or a shareholder may have multiple lots of S corporation stock acquired on different dates and at different prices.
- If the shareholder makes a partial disposition of S corporation stock, the S corporation would not necessarily have the information needed to identify the specific lot from which the disposition occurred and, correspondingly, the proper adjustment to basis.
- There are other items that can affect a shareholder’s basis of which the S corporation is unaware, such as the increase in basis for gift tax paid under section 1015(d) (GAO-10-195, December 2009); and
- The election under Treas. Reg. § 1.1367-1(g) relating to the elective ordering rule may affect a shareholder’s basis calculation. This particular election, however, is made at the shareholder level, not the S corporation level.
In light of the above obstacles, combined with the need for accurate tracking of shareholder stock and debt basis, AICPA recommends (Recommendation to Develop a New Income Tax Form to Improve S Corporation Shareholder Compliance with the Basis Rules of Section 1367, AICPA February 21, 2017) that the IRS develop a new shareholder-level income tax form that shareholders are required to attach to any income tax return with items of income, loss, deduction, or credit of an S corporation.
It must be noted many tax software companies have seemed to design just such a worksheet. The difference between a software worksheet versus an IRS form and instructions may be too vast.
The purpose of the proposed form is to compute the S corporation shareholder’s basis in the stock and debt of the S corporation. The form can provide both shareholders and the IRS with the information necessary to properly determine the taxability of distributions and loan repayments made by the S corporation to its shareholders, gain or loss on stock dispositions, as well as the amount of losses and deductions that shareholders are allowed to take into account when computing taxable income for the year.
Such a form would be of great use to taxpayers and practitioners. However, often generous aspirations in the vein of “Tax Simplification” are not as easily converted to practical steps before the spirit evaporates. We must wait and see if the IRS Office of Taxpayer Burden Reduction joins this crusade. If the proposed form is developed, we may now begin speculation of just how many pages of instructions would be needed. Additionally, provided an “S Corporation Shareholder Basis” form be developed, just how long would it take to morph into another useful yet difficult “Partner/Member Basis” form?
Honor the Light Brigade, Noble six hundred.
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Dennis P. Benvie MS, CPA is Director, Tax and Advisory Content, for Surgent Professional Education. He has been in practice for more than 30 years and has been a national CPE Discussion Leader for 25 years.