On October 16, 2104 the American Institute of CPAs sent a letter to the IRS questioning the ordering rule under Internal Revenue Code Section 1368, asserting that an ambiguity exists under current rules for determining adjustments to the accumulated adjustment account of an S corporation. The question arises when ordinary and redemption distributions are made in the same tax year, or when ordinary distributions are made after redemption distributions.
The letter suggests that “adjusting the AAA balance for all ordinary distributions regardless of the timing relative to the redemption provides a more reasonable outcome in most circumstances. Since a complete redemption is a sale or exchange transaction, the presence of AAA is irrelevant for purposes of determining the shareholder’s gain or loss on the redemption. Allocating more AAA to redemptions by ignoring post redemption distributions does not benefit the redeemed shareholder, while it provides a smaller AAA for later distributions to the recipient shareholders.”
Within the letter, the AICPA recommended that the “IRS issue a revenue ruling to provide that the AAA balance is adjusted for all ordinary distributions regardless of the timing relative to the redemption, through specific examples or modification of the existing regulations.”
<a href=”www.aicpa.org/Advocacy/Tax/DownloadableDocuments/2014-10-16-AICPA-Comment-Letter-S-Corporation-AAA-Ordering-Rule.pdf”>Read the letter on AICPA’s website</a>