To Reset or Not to Reset AAA?

A Tricky Question for Newly Reelected S Corporations

John W. McKinley, JD, LLM, CPA, CGMA, and Eric Zilber

In 2014, the IRS's Office of Chief Counsel (OCC) addressed what happens to a taxpayer's beginning accumulated adjustments account (AAA) if a prior S corporation that terminates its S status, voluntarily or involuntarily, decides to reelect that status after waiting the appropriate time period under Internal Revenue Code (IRC) section 1362(g). Does the ending AAA balance, taking into account the post-termination transition period (PTTP), carry over from the former S corporation, or does it reset to zero upon reelection? The IRS's answer was the latter [Chief Counsel Advice (CCA) 201446021, Jul. 23, 2014, http://bit.ly/2c7CEos]. According to the OCC, it does not matter whether the AAA balance resets to zero because there will be no adverse effects to the taxpayer's stock basis, which continues to carry over from the PTTP. This article will explore the ramifications of this memorandum, along with an alternative view that brings to light adverse tax consequences that a newly reelected S corporation could potentially suffer if AAA balance is reset to zero.