Td 9428

Federal Register / Vol. 73, No. 203 / Monday, October 20, 2008 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9428]
RIN 1545–BD72

Section 1367 Regarding Open Account
Debt
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

SUMMARY: This document contains final
regulations relating to the treatment of
open account debt between S
corporations and their shareholders.
These final 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
regulations affect shareholders of S
corporations and are necessary to
provide guidance needed to comply
with the applicable tax law.
DATES:
Effective Date: These regulations are
effective on October 20, 2008.
Applicability Date: For dates of
applicability, see § 1.1367–3.
FOR FURTHER INFORMATION CONTACT:
Stacy L. Short or Deane M. Burke, (202)
622–3070 (not a toll-free number).
SUPPLEMENTARY INFORMATION:

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Background
This document amends § 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 distributions not
includible in income of the shareholder
by reason of section 1368 (nontaxable
distributions), and the shareholder’s pro
rata share of the losses and deductions
(separately and nonseparately computed
losses), any expense of the corporation

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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. 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. Taxpayers should also
remember that all advances to an S
corporation by a shareholder are subject
to the general tax principles for debt,
whether evidenced by a written
instrument or not.
On August 25, 2005, the Tax Court
issued its decision in Brooks v.
Commissioner, TC Memo. 2005–204,
involving open account debt. Under its
interpretation of § 1.1367–2, 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.’’ This

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allowed the taxpayer in Brooks to defer
indefinitely the recognition of income
on any repayment of his open account
debt over the several years during which
the taxpayer and the S corporation made
advances and repayments, respectively.
On April 12, 2007, the Treasury
Department and the IRS published a
notice of proposed rulemaking and a
notice of public hearing (REG–144859–
04, 2007–20 IRB 1245) in the Federal
Register (72 FR 18417) proposing
amendments to the regulations relating
to the treatment of open account debt
between S corporations and their
shareholders. A public hearing on the
proposed regulations was scheduled for
July 31, 2007, but was cancelled because
no one requested to speak. However,
comments responding to the proposed
regulations were received. After
consideration of these comments, the
proposed regulations are adopted as
revised by this Treasury decision. These
final regulations generally retain the
provisions of the proposed regulations
with the modifications discussed in the
preamble.
Summary of Comments and
Explanation of Revisions
1. Need for Regulatory Change
All of the comments received in
response to the proposed regulations
suggested that the regulations were
overly broad and should be withdrawn.
Two commentators suggested that
amending the regulations for open
account debt is not an appropriate
approach for the Treasury Department
and the IRS to address concerns
regarding transactions similar to that in
Brooks. Instead, the commentators
asserted, such concerns should be
addressed through established judicial
doctrines such as substance over form,
business purpose, sham transaction, and
economic substance. One commentator
alternatively recommended a narrowly
tailored anti-abuse rule targeting open
account debt instead of broader rules
that would apply to all such debt.
The Treasury Department and the IRS
continue to believe that regulatory
guidance on open account debt is
necessary. The Treasury Department
and the IRS believe that the treatment of
open account debt as interpreted in
Brooks permits tax consequences that
are inconsistent with the original
purpose of § 1.1367–2 and is not
conducive to sound tax administration.
Neither established judicial doctrines
alone nor a narrowly tailored anti-abuse
rule suggested by the commentators
would adequately address these
concerns, though the Treasury
Department and the IRS continue to

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recognize the applicability of the
judicial doctrines in appropriate cases
in addition to these final regulations.
2. Aggregate Principal Threshold
Amount
The proposed regulations defined
open account debt as shareholder
advances not evidenced by separate
written instruments for which the
principal amount of the aggregate
advances (net of repayments on
advances) did not exceed $10,000 per
shareholder at the close of any day
during the S corporation’s taxable year.
Shareholders were required to
determine for open account debt
purposes whether shareholder advances
and repayments on the advances
exceeded the $10,000 aggregate
principal threshold on any day during
the S corporation’s taxable year. To
make such a determination,
shareholders were required to maintain
a ‘‘running balance’’ of shareholder
advances and repayments on advances,
and the outstanding principal amount of
the open account debt. If the resulting
aggregate principal of the running
balance exceeded $10,000 at the close of
any day during the S corporation’s
taxable year, the entire principal
amount of the indebtedness would no
longer constitute open account debt
effective at the close of that day.
Commentators suggested that the
proposed regulations’ aggregate
principal threshold of $10,000 was too
low for most businesses. One
commentator asserted that establishing
any aggregate principal threshold dollar
amount for open account debt in final
regulations would be arbitrary and
would impose a certain compliance
burden on smaller businesses. However,
that commentator also suggested that
increasing the aggregate principal
threshold dollar amount would mitigate
the compliance burden. The
commentators suggested that if the final
regulations adopt any threshold dollar
amount for open account debt, such a
threshold amount should be increased
to an amount ranging from $100,000 to
$1 million.
After considering the comments on
the aggregate principal threshold dollar
amount, and on recognizing customary
business practices as noted by the
commentators, the Treasury Department
and the IRS have concluded that the
aggregate principal threshold dollar
amount for open account debt should be
increased and that other changes are
necessary. Therefore, the final
regulations adopt a $25,000 aggregate
principal threshold amount per
shareholder for open account debt. For
example, an S corporation with ten

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shareholders could receive up to
$250,000 of open account debt as long
as no single shareholder advanced more
than $25,000. The Treasury Department
and the IRS believe that the $25,000
threshold, together with certain other
changes noted below, balances concerns
over deferral potential with normal
business practices. Under the final
regulations, for any particular
shareholder advances and repayments
on those advances for which, as of the
specified determination date, the
aggregate principal balance exceeds the
$25,000 aggregate principal threshold
amount will no longer constitute open
account debt, but instead will be treated
as debt evidenced by a separate written
instrument subject to the basis
adjustment and repayment accounting
rules applicable to S corporation
shareholder debt generally.
As noted in the preamble to the
proposed regulations, the $10,000
aggregate principal threshold amount
for open account debt for purposes of
§ 1.1367–2 was modeled after section
7872(c)(3) and the de minimis exception
for corporation-shareholder loans in
§ 1.7872–9 of the proposed regulations.
However, the Treasury Department and
the IRS do not believe it is necessary
that the threshold amount for open
account debt be modeled after the rules
under § 1.7872–9 regarding corporateshareholder loans. Nevertheless, despite
the $25,000 threshold amount for open
account debt in these final regulations,
the provisions under section 7872 and
related regulations for corporateshareholder loans in excess of $10,000
separately apply to open account debt in
excess of $10,000 for each advance if the
corporation is not obligated to pay a
market rate of interest on the advances.
3. Monitoring the Aggregate Principal
Threshold Amount
The proposed regulations effectively
required day-to-day monitoring of open
account debt. For purposes of
determining compliance with the
aggregate principal threshold amount
for open account debt, the shareholder
was required to maintain a daily
running balance of shareholder
advances and repayments on such
advances, and the outstanding principal
amount of the open account debt. Some
of the commentators suggested that the
daily monitoring requirement would
impose an unreasonable burden on
shareholders and recommended that the
running balance requirement be tested
quarterly, annually or when the
corporation maintains and updates its
other books and records. One
commentator described the practice by
many closely held corporations of

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reconciling and accounting only once a
year and noted that only then would
such an S corporation and its
shareholder(s) know what payments are
legitimately charged to the corporation
as opposed to those appropriately
charged to the shareholder(s).
Another commentator suggested that
with daily monitoring, a maximum
threshold rule for open account debt is
too harsh for shareholders insofar as it
immediately changes the treatment of
such debt the principal balance of
which exceeds the threshold by a single
cent on any day, resulting in a ‘‘cliff’’
effect. The commentator suggested that
in order to mitigate this ‘‘cliff’’ effect,
the final regulations should adopt a
second prong to the aggregate principal
threshold amount test so that advances
would fail to meet the definition of open
account debt only if both the aggregate
principal of the running balance
exceeded the applicable aggregate
principal threshold dollar amount on
any given day of the year and the
balance at the end of the year exceeded
the average of the daily balances
throughout the year. The commentator
provided examples of intended
beneficiaries of such an ‘‘averaging’’
rule, for example, shareholders who
need to advance their S corporation
more funds on a short-time basis but
end the year with an outstanding
principal amount of the open account
debt below the threshold level.
After careful consideration of these
comments, the Treasury Department
and the IRS have concluded that
extending the period for which a
shareholder determines whether
shareholder advances and repayments
exceed the aggregate principal threshold
dollar amount for open account debt
would reduce both the complexity of
the regulations and any perceived
burden on shareholders in making such
determinations. In addition, such a
modified rule should alleviate concerns
over any potential ‘‘cliff’’ effect resulting
from a day-to-day determination of
threshold amount as required in the
proposed regulations. The Treasury
Department and the IRS also recognize
that shareholder advances made to an S
corporation and subsequently repaid
during the same taxable year of the S
corporation are not available for
inclusion in the shareholder’s basis in
the indebtedness for purposes of passing
through additional losses to the
shareholder at the end of the taxable
year.
Therefore, the final regulations do not
adopt a daily determination of whether
shareholder advances and repayments
on the advances exceed the $25,000
threshold amount. Instead, the final

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regulations provide that a determination
of whether the threshold balance of
$25,000 is exceeded will be made at the
end of the taxable year of the S
corporation. Under these final
regulations, however, if open account
debt is disposed of in whole or in part
before the end of the S corporation’s
taxable year, the determination of
whether the advances and repayments
have exceeded the designated aggregate
principal threshold amount must be
made immediately before the
disposition of the debt during that
taxable year. Moreover, if a shareholder
with open account debt is no longer a
shareholder at the end of the S
corporation’s taxable year, the
determination must be made
immediately before the shareholder’s
interest in the S corporation is
terminated.

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4. Character of Income/Gain
Recognition
One of the commentators suggested
that the final regulations address the
issue of how to characterize any income
or gain that is recognized upon
repayment of both open account debt
and indebtedness evidenced by a
written instrument. While recognizing
the commentators’ concerns, the
Treasury Department and the IRS
believe that the characterization issue is
beyond the scope of these final
regulations. However, the Treasury
Department and the IRS intend to
continue considering the
characterization issue.
5. Effective Date Operation
The effective date in the proposed
regulations provided that the proposed
rules for open account debt applied to
any shareholder advances to the S
corporation made on or after the date
the regulations were published as final
regulations and repayments on those
advances by the S corporation. Thus, all
open account debt (net of repayments)
prior to the publication of the final
regulation was outside the scope of the
proposed regulations, irrespective of the
outstanding principal amount.
One of the commentators believed
that the effective date language in the
proposed regulations was subject to two
interpretations. Under the first
interpretation, the rules under these
final regulations (New Rules) would
apply only to open account debt created
on or after the effective date, that is,
shareholder advances made on or after
the effective date and repayments on
those same advances. The rules under
the prior final regulations (as contained
in the 26 CFR edition revised April 1,
2007) (Old Rules) would apply to open

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account debt created before the effective
date, that is, shareholder advances with
respect to pre-effective date open
account debt and repayments on those
prior advances. Accordingly, a
shareholder could have open account
debt, subject to the Old Rules, and open
account debt, subject to the New Rules,
to which new shareholder advances and
repayments on those advances could be
made after the effective date.
Under the second interpretation, a
shareholder could not make additional
advances with respect to open account
debt created before the effective date but
could receive repayments on that debt
under the Old Rules. Accordingly, the
New Rules would apply to all
shareholder advances on and after the
effective date, as well as repayments on
those advances, and the Old Rules
would apply only to repayments on preeffective date open account debt.
The Treasury Department and the IRS
intend that the rules under these final
regulations (New Rules) apply to any
and all shareholder advances made on
and after the effective date. The rules
under these final regulations (New
Rules) also apply to repayments on such
advances. However, if a shareholder has
open account debt (net of prior
repayments in the taxable year)
outstanding prior to the effective date of
these final regulations, the rules under
the prior final regulations (Old Rules)
apply to any repayments on such preeffective date open account debt.
Accordingly, that pre-effective date
open account debt will not be subject to
any aggregate principal threshold dollar
amount. The shareholder may not make
additional advances with respect to the
pre-effective date open account debt
(because all shareholder advances made
on or after the effective date of these
final regulations constitute new open
account debt subject to these final
regulations).
For instance, assume that the effective
date of these final regulations falls
within the taxable year of shareholder
A’s S corporation. Also assume that, at
the beginning of the S corporation’s
taxable year, A will have existing open
account debt with an outstanding
principal balance of $12,000. Assume
further that A will make an additional
advance of $3,000 to and will receive a
$2,000 repayment from his S
corporation prior to the effective date.
Thus, as of the effective date, A will
have existing open account debt with an
outstanding principal balance of
$13,000 (A would net the pre-effective
date advance and repayment for the
taxable year and combine that net
advance of $1,000 with the $12,000
outstanding aggregate principal balance

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of the then existing open account debt).
This $13,000 pre-effective date open
account debt would not be subject to
these final regulations and, thus, would
not be subject to any aggregate principal
threshold dollar amount and would be
repaid under the rules of the prior final
regulations. If, on or after the effective
date of these final regulations, A were
to both make an advance of $5,000 to
his S corporation and receive a $1,000
repayment on that advance, the advance
and repayment would constitute
separate new open account debt subject
to the rules under these final
regulations.
Shareholders also have the option to
apply these rules to shareholder
advances to the S corporation and
repayments on those advances by the S
corporation made before the effective
date of these regulations. Using the
example above, A would have the
option to net the $5,000 advance and
$1,000 repayment.
Effective/Applicability Date
The regulations apply to any and all
shareholder advances to the S
corporation made on or after October 20,
2008, and repayments on those
advances by the S corporation.
Special Analyses
It has been determined that this
Treasury decision 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, the notice
of proposed rulemaking that preceded
these regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Drafting Information
The principal authors of these final
regulations are Stacy L. Short and Deane
M. Burke of the Office of the Associate
Chief Counsel (Passthroughs and
Special Industries). However, other
personnel from the IRS and the Treasury
Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.

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Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:

■

PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues 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. paragraph
(a)(2) is added.
■ 2. Paragraphs (c)(2) and (d)(1) are
revised.
■ 3. Paragraph (d)(2) is redesignated as
paragraph (d)(3) and new paragraph
(d)(2) is added.
■ 4. Paragraph (e) is amended by adding
Examples 6, 7 and 8.
The revisions and additions read as
follows:
■

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§ 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 $25,000 of
indebtedness of the S corporation to the
shareholder at the close of the S
corporation’s taxable year. Advances
and repayments on open account debt
are treated as a single indebtedness.
(ii) Exception. If the shareholder
advances not evidenced by a separate
written instrument, net of repayments,
exceeds an aggregate outstanding
principal amount of $25,000 at the close
of the S corporation’s taxable year, for
any subsequent taxable year the
aggregate principal amount of that
indebtedness is treated in the same
manner as indebtedness evidenced by a
separate written instrument for
purposes of this section. For any
subsequent taxable year, that

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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) * * *
(2) Multiple indebtedness. If a
shareholder holds more than one
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. The amounts of the
adjustments to basis of indebtedness
(including open account debt) 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. Except as
provided in paragraph (d)(2) of this
section, if a debt 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 during
the taxable year. To the extent any
indebtedness of the S corporation to the
shareholder is disposed of or repaid (in
whole or in part) during the taxable year
and the shareholder’s basis in that
indebtedness has been reduced under
paragraph (b) of this section and is not
restored completely under paragraph (c)
of this section, the disposition or
repayment is a recognition event
effective immediately before the

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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 S
corporation’s taxable year are netted at
the close of the S corporation’s taxable
year to determine the amount of any net
advance or net repayment. The net
advance or net repayment is combined
with the outstanding 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 (unless the aggregate principal
amount meets the exception defined in
paragraph (a)(2)(ii) of this section at the
close of the taxable year). However, if
the shareholder in the S corporation is
not a shareholder of the S corporation
at the close of the S corporation’s
taxable year, such advances and
repayments on open account debt are
netted, and the basis of that
indebtedness is restored under
paragraph (c) of this section, effective
immediately before the shareholder
terminates his or her interest in the S
corporation. If any open account debt is
disposed of before or upon the close of
the taxable year, the disposition is
effective at the close of the S
corporation’s taxable year, and all
advances and repayments are netted
immediately prior to the disposition and
the basis of that indebtedness is restored
under paragraph (c) of this section,
effective at the close of the S
corporation’s taxable year.
(ii) Exception. Shareholder
indebtedness that is open account debt
at the beginning of the taxable year but
meets the exception defined in
paragraph (a)(2)(ii) of this section at the
close of the taxable year, adjustments to
the basis of the indebtedness for that
taxable year follow the provisions for
open account debt. The resulting
aggregate principal amount of
indebtedness is treated as the principal
amount of a debt evidenced by a
separate written instrument for any
subsequent taxable year, and is no
longer subject to the open account debt
provisions of this section.
*
*
*
*
*
(e) * * *
Example 6. The $25,000 Aggregate
Principal Amount Applies to Each
Shareholder. (i) A and B have been the two
shareholders in Corporation S since 2000. As
of the end of the 2008 taxable year, the bases
of A’s and B’s stock are both zero. On June
1, 2009, A advances S $16,000, which is not
evidenced by a written instrument. On
August 1, 2009, B advances S $22,000, which

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Federal Register / Vol. 73, No. 203 / Monday, October 20, 2008 / Rules and Regulations
is not evidenced by a written instrument.
Both the $16,000 advance and the $22,000
advance are open account debt and remain
outstanding at those amounts during 2009.
There is no net increase under paragraph (c)
of this section in year 2009.
(ii) At the close of the 2009 taxable year,
A’s open account debt does not exceed
$25,000. A therefore carries forward to the
beginning of the 2010 taxable year the
$16,000 as open account debt.
(iii) At the close of the 2009 taxable year,
B’s open account debt does not exceed
$25,000. B therefore carries forward to the
beginning of the 2010 taxable year the
$22,000 as open account debt.
Example 7. Treatment of open account
debt. (i) The facts are the same as in Example
6, in addition to which, on December 31,
2009, A’s basis in the open account debt is
reduced under paragraph (b) of this section
to $8,000. On April 1, 2010, S repays A
$4,000 of the open account indebtedness. On
September 1, 2010, A advances S an
additional $1,000, which is not evidenced by
a written instrument. There is no net increase
under paragraph (c) of this section in year
2010.
(ii) The $4,000 April repayment S makes to
A and A’s $1,000 September advance are
netted to result in a net repayment of $3,000
for the taxable year on A’s $16,000 open
account debt carried forward from 2009.
Because there is no net increase in 2010, no
basis of indebtedness is restored for the 2010
taxable year, and A realizes $1,500 of income
on the $3,000 net repayment at the close of
the 2010 taxable year.
(iii) At close of the 2010 taxable year, A’s
open account debt does not exceed $25,000.
The net repayment of $3,000 for the taxable
year on A’s $16,000 open account debt
carried forward from 2009, leaves A with an
open account debt of $13,000 to carry
forward as open account debt to the
beginning of the 2011 taxable year.
Example 8. Treatment of shareholder
indebtedness not evidenced by a written
instrument which exceeds $25,000. (i) The
facts are the same as in Example 7, in
addition to which, on February 1, 2011, S
repays $5,000 of the open account debt and
on March 1, 2011, A advances S $20,000,
which is not evidenced by a written
instrument.
(ii) At the close of the 2010 taxable year,
A has an open account debt of $13,000 to
carry forward as open account debt to the
beginning of the 2011 taxable year.
(iii) The 2011 advances and repayments are
netted to result in a net advance of $15,000
on A’s $13,000 open account debt carried
forward from 2010, increasing A’s open
account debt to $28,000 as of the close of the
2011 taxable year. Because A’s open account
debt exceeds $25,000, for any subsequent
taxable year the $28,000 indebtedness will be
treated in the same manner as indebtedness
evidenced by a separate written instrument
for the purposes of this section. Because
there is no net increase in 2011, no basis of
indebtedness is restored for the 2011 taxable
year.

Par. 3. Section 1.1367–3 is revised to
read as follows:

■

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15:13 Oct 17, 2008

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§ 1.1367–3

Effective/Applicability date.

Section 1.1367–2(a), (c)(2), (d)(2), and
(e) Example 6, Example 7, and Example
8 apply to any shareholder advances to
the S corporation made on or after
October 20, 2008 and repayments on
those advances by the S corporation.
The rules that apply with respect to
shareholder advances to the S
corporation made before October 20,
2008, are contained in § 1.1367–3 in
effect prior to October 20, 2008. (See 26
CFR part 1 revised as of April 1, 2007.)
Shareholders have the option to apply
these rules to shareholder advances to
the S corporation made before October
20, 2008, and repayments on those
advances by the S corporation.
Approved: September 25, 2008.
Linda E. Stuff,
Deputy Commissioner for Services and
Enforcement.
Eric Solomon,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. E8–24926 Filed 10–17–08; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9424]
RIN 1545–BB61

Unified Rule for Loss on Subsidiary
Stock; Correction
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations; Correction.
AGENCY:

SUMMARY: This document contains
corrections to final regulations (TD
9424) that were published in the
Federal Register on Wednesday,
September 17, 2008 (73 FR 53934)
under sections 358, 362(e)(2), and 1502
of the Internal Revenue Code. The final
regulations apply to corporations filing
consolidated returns, and corporations
that enter into certain tax-free
reorganizations. The final regulations
provide rules for determining the tax
consequences of a member’s transfer
(including by deconsolidation and
worthlessness) of loss shares of
subsidiary stock. In addition, the final
regulations provide that section
362(e)(2) generally does not apply to
transactions between members of a
consolidated group. Finally, the final
regulations conform or clarify various
provisions of the consolidated return
regulations, including those relating to
adjustments to subsidiary stock basis.

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This correction is effective
October 20, 2008, and is applicable on
September 17, 2008.
FOR FURTHER INFORMATION CONTACT:
Marcie P. Barese, (202) 622–7790, Sean
P. Duffley, (202) 622–7770, or Theresa
Abell (202) 622–7700 (none of the
numbers are toll-free).
SUPPLEMENTARY INFORMATION:
DATES:

Background
The final regulations that are the
subject of this document are under
sections 337, 358, 362, 1502 of the
Internal Revenue Code.
Need for Correction
As published, final regulations (TD
9424) contain errors that may prove to
be misleading and are in need of
clarification.
Correction of Publication
Accordingly, the publication of the
final regulations (TD 9424), which were
the subject of FR Doc. E8–21006, is
corrected as follows:
1. On page 53937, column 3, in the
preamble, under the paragraph heading
‘‘vii. Adjustments for Section 362(e)(2)
Transactions’’, first paragraph, line 9,
the language ‘‘not elect to apply the rule
in the final’’ is corrected to read ‘‘not
apply the rule in the final’’.
2. On page 53938, column 3, in the
preamble, under the paragraph heading
‘‘B. Section 1.1502–36(b): Basis
Redetermination Rule’’, first paragraph
of the column, line 1, the language
‘‘have no correlation to unrecognized
loss’’ is corrected to read ‘‘have no
correlation to unrecognized gain or
loss’’.
3. On page 53938, column 3, in the
preamble, under the paragraph heading
‘‘B. Section 1.1502–36(b): Basis
Redetermination Rule’’, first paragraph
of the column, line 17, the language
‘‘contributions of assets in exchanged
for’’ is corrected to read ‘‘contributions
of assets in exchange for’’.
4. On page 53938, column 3, in the
preamble, under the paragraph heading
‘‘i. Exceptions to Basis Redetermination
Rule’’, last paragraph of the column,
line 7, the language ‘‘to a nonmember in
a one or more fully’’ is corrected to read
‘‘to a nonmember in one or more fully’’.
5. On page 53939, column 3, in the
preamble, under the paragraph heading
‘‘i. Treatment of Intercompany Debt’’,
first paragraph, line 7, the language
‘‘more like to capital transactions than’’
is corrected to read ‘‘more like capital
transactions than’’.
6. On page 53940, column 3, in the
preamble, under the paragraph heading
‘‘i. Lower-Tier Subsidiary Rules’’,
second paragraph, line 7, the language

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