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TAX CLINIC

long-term or short-term depending similar, but distinguishable, issue in dicta remained at zero. In year 3, Corp
upon the shareholder’s holding period in (see Jamison et al., “Current Develop- had $90,000 of ordinary income. In
the stock. ments in S Corporations,” 51 The Tax year 3, A reported his share of Corp’s
Loss and deduction items in ex- Adviser 322 (May 2020)).) income and increased the basis in his
cess of basis are suspended under Corp stock by this income. In year
Sec. 1366(d)(2) until the next tax year IRS’s position 4, Corp had $10,000 of long-term
and are carried forward to each suc- The IRS’s position assumes for purposes capital gain income, and A received
ceeding tax year until the shareholder of the shareholder’s basis computation an ordinary loss of $75,000. A’s year
has basis. that the loss or deduction item is prop- 1, year 2, and year 3 tax years are now
If a shareholder completely dis- erly limited to the shareholder’s stock closed under the statute of limitation
poses of the stock while loss and and debt basis. Then in a subsequent for assessment. Year 4 is open under
deduction items are suspended under year, when the shareholder has basis, the statute of limitation.
Sec. 1366(d)(2), the loss and deduction the shareholder’s basis is reduced by
items are permanently lost and may any loss or deduction previously taken In this example, A’s basis at the be-
not be claimed. Any loss and deduction in excess of basis. The IRS relies on ginning of year 4 is $30,000, computed
items suspended under Sec. 1366(d)(2) Sec. 6214(b), which allows facts from under the normal stock basis ordering
cannot be used to offset the gain on the closed statute years to be considered in rules as if the shareholder had properly
sale of the stock. computing the current-year computation limited his loss and deduction items
of tax items, and Regs. Sec. 1.1016-6(a), to stock basis. However, A may report
Failure to properly limit loss and which provides that adjustments to that his basis at the beginning of year 4
deduction items basis must always be made to eliminate is $90,000, relying upon the statute of
Failure to properly limit loss and deduc- double deductions or their equivalent, to limitation on assessment being closed
tion items to the shareholder’s stock and reduce basis in the current open year for for year 1, year 2, and year 3.
debt basis causes problems for the IRS items that were improperly claimed in To account for the differences in
and return preparers in the computation a prior tax year. The shareholder is pre- basis computations, the IRS will begin
of shareholder basis. cluded from claiming the loss a second year 4 with $90,000 of beginning stock
If the statute of limitation on as- time when the basis is reduced, under basis and add the $10,000 of year 4
sessment is still open, the shareholder the principles of estoppel (Regs. Sec. long-term capital gain, increasing A’s
should file an amended return to correct 1.1016-6(b)). stock basis to $100,000. A’s stock basis
the items of loss and deduction reported. The IRS provides that the losses in is then reduced by the $60,000 of prior-
If the statute of limitation on assessment excess of basis from closed statute years year losses in excess of basis from closed
is closed, then the shareholder must must reduce basis in the open statute statute years. This allows A to report a
determine the effect on the current-year year after considering the positive ad- $40,000 ordinary loss, and he must sus-
basis computation for which the statute justments to basis but before considering pend the remaining $35,000 of ordinary
of limitation is still open. nondividend distributions; nondeduct- loss until he has basis in a future year.
The IRS provides its position in ible, noncapital expenses; and any other (Note that there is no tax difference in
Technical Advice Memorandum loss and deduction items. this example if the adjustment to stock
(TAM) 9304004, Field Service Advice basis takes place in year 3, a closed stat-
200230030, and TAM 200619021 for Example 1: A is the 100% sharehold- ute year, or year 4, the open statute year.)
how to report loss and deduction items er of Corp, which is an S corpora- The IRS’s position is not the same as
claimed in excess of basis from closed tion. In year 1, Corp had $50,000 in negative basis. For example, if a share-
statute years. The IRS reiterated its capital losses, and A had an adjusted holder has a loss in excess of basis from
position in its Losses Claimed in Excess basis of $20,000 in his Corp stock. a closed statute year and the shareholder
of Basis Process Unit (April 30, 2018) On his individual income tax return sells his or her stock, the IRS does not
and is enforcing it through the S Cor- for year 1, A deducted the entire require the shareholder to report more
poration Losses Claimed in Excess of $50,000 capital loss and reduced his gain than would otherwise be required.
Basis Campaign. basis in his Corp stock to zero. In
As of publication, no court has con- year 2, Corp had an ordinary loss of Example 2: B is the 100% sharehold-
sidered the merits of the IRS’s position. $30,000. On his tax return for year 2, er of Corp, which is an S corporation.
(In Tomseth, No. 6:17-cv-02017-AA A deducted the $30,000 ordinary loss B has $100,000 of losses in excess
(D. Or. 9/27/19), the court considered a and claimed that his adjusted basis of basis from closed statute years.

28 February 2022 The Tax Adviser