The American Institute of CPAs has sent a comment letter to the Internal Revenue Service and the Treasury Department recommending that S corporations be entitled to the same tax deductions as C corporations when it comes to worthless stocks.

In a letter last week, the AICPA asked the IRS to allow S corporations to take an ordinary loss deduction treatment for worthless stocks under Section 165(g)(3) of the Tax Code rather than a capital loss treatment under Section 165(g)(1).  If adopted, the recommendation would equalize the worthless stock deductions treatment of S corporations with C corporations.

While Section 165(g)(3) does not define “worthless,” courts have used various standards to determine that a stock is worthless relating to the value of a company, the AICPA noted. However, the relevant authorities have not conclusively established whether an S corporation is entitled to ordinary loss treatment under Section 165(g)(3), so further guidance from the IRS and the Treasury is needed. 

The AICPA explained that Section 165(a) provides that a deduction is allowed for any loss sustained during the taxable year and not compensated for by insurance or otherwise. Section 165(g)(1) provides that, if any security that is a capital asset becomes worthless during the taxable year, the loss from worthlessness is treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset. 

In the letter, Troy K. Lewis, chair of the AICPA Tax Executive Committee, wrote, “We encourage the IRS and Treasury to provide guidance that an S corporation is entitled to the benefits of section 165(g)(3) to the same extent as a C corporation. We believe our proposed approach offers equity and fairness, which is a principle of good tax policy that advocates for similarly situated taxpayers to have similar taxation.”

The AICPA noted this specific item is listed in the Department of the Treasury 2015-2016 Priority Guidance Plan as the first priority in the S corporations category.

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