S corporations, at present, are the largest tax filer in the United States of America. This book provides, in a single volume, a complete guide and reference tool for the tax practitioner to solve the many problems arising in regard to S corporate taxation. Code Sec. 199A generally allows shareholders of an S corporation a 20% deduction on S corporate income plus special rules for tangible property acquisitions. Because there were ambiguities in the statute, on August 8, 2018, the Treasury issued proposed regulations to interpret Code Sec. 199A. This 8th edition at ¶725 provides an extensive detailed discussion of the proposed regulations with many examples to explain the operation of Code Sec. 199A.
While this book does not cover every single case, ruling, or procedure on a particular point, the reader is provided with the main case or point in a particular area, so that this situation can be understood quickly. To assist the reader, tax planning situations are presented throughout the book. As an example, Majestic Star Casino 2013-1 USTC ¶50,338 (3rd Cir. 2013) discussed at various points in the book held that the S election is a personal right in bankruptcy, not a property right; thus, if the shareholders of an S corporation revoke the S election just before filing the corporation’s bankruptcy petition, it is not a transfer in fraud of creditors and the shareholders are not responsible for the S corporation’s debts unless they personally guaranteed them. In re Health Diagnostic Laboratory, Inc. 578 B.R. 552, 126 AFTR 2d 2017 -6736 (Bankr.ED Va 2017) sustained this same result in the 4th Circuit. Scott Singer Installations, Inc. TC Memo 2016-161 discussed at ¶904.10 involved a case where a shareholder claimed his contributions of cash into his S corporation were loans, but there was no documentation of the loans on the corporate books. The contributions were made during a period of both corporate profitability and loss. The Court felt that during profitable periods, the contributions were loans, but during losses, were contributions to capital.
This book is organized into sixteen chapters. Chapter 1 discusses the tax considerations in electing S corporate status, as well as the advantages and disadvantages of S corporate taxation. Chapters 2-10 detail operations of an S corporation, discussing the statutory requirements to be an S corporation, the types of taxpayer who can qualify as shareholders, considerations that one must make before converting a C corporation to S status, etc. Chapter 11 sets forth income and estate planning situations for S corporations. Chapter 12 covers changes which could occur in the life of an S corporation, namely, termination and revocation of the S corporate status, sale of S corporate stock, reorganization of the corporation, etc.
Chapter 13 provides the reader with a comparison of S corporations to other business entities, such as one-person limited liability companies, partnerships, and C corporations. Chapter 14 discusses S corporation subsidiaries, Chapter 15, employee stock ownership plans (“ESOPs”) for S corporations, and Chapter 16, a detailed discussion of the final and proposed regulations under Code Sec. 1411. The author attempts to keep this book current and up to date. Thus, ¶724 in Chapter 7 discusses the final tangible property regulations which went into effect as of January 1, 2014 and as aforesaid, ¶725 discusses in detail Code Sec. 199A and its proposed regulations. Further, the Appendices provide practical information for the tax practitioner to utilize in his or her practice.
This book is not intended to apply to all circumstances, and the Forms contained herein may not be applicable in every situation. Further, the law is constantly changing in the field of S corporations. Accordingly, it is strongly urged that the current status of all statutes, case law, rulings, regulations, revenue procedures, announcements, notices, Forms and/or applications thereof be confirmed before relying on the information set forth in this book.
It should be noted that in writing this book, the author has attempted to make the table of contents read like an index. The reader has three easy means to solve a problem or locate a topic: the Contents, Contents in Detail on page xiii and the Index. In addition, the author has provided a table of cases, statutes, treasury regulations, rulings, and procedures so that the reader will have an easy-to-use method to solve a specific problem. To assist the reader in practice, the Appendices supply sample language for various situations regarding S corporations.
This book is intended to remove some of the mystery surrounding S corporations and their complexities. Because of its thoroughness, multitudinous examples, and tax pointers, this book should provide the reader with a unique resource tool to be utilized as a major addition to a tax library.
Table of Contents:
Background and Environment
101 Overview
102 Background of Subchapter S
103 Authorities for S Corporation Tax Rules
104 Definitions
105 Advantages of S Corporations over C Corporations
106 Disadvantages of S Corporations Compared to C Corporations
107 Special Considerations for Personal Service Corporations
108 Comparison of S Corporations to Partnerships
109 Comparison of S Corporations to Small Business Stock Corporations
110 Other Considerations
111 Value of S Corporation Status
112 Use of the S Corporation in Abusive Transactions
113 Proposals for Change
Appendix 1-1 User Fees Applicable to Problems Discussed in S Corporation Taxation
Eligibility for the S Election
201 Overview
202 Domestic Corporation Requirement
203 Eligible Shareholders
204 Limit on Number of Shareholders
205 One Class of Stock
206 Affiliated Groups
207 Other Associations
208 Other Ineligible Corporations
209 Banks and Bank Holding Companies
210 Other Restrictions on Eligibility
211 Practice Aids
C Corporations Considering the S Election: Advantages, Disadvantages, and Solutions
301 Overview
302 Possible Secondary Costs of Making S Election
303 Pension, Profit-Sharing and Employee Fringe Benefit Considerations
304 LIFO Recapture
305 Earnings and Profits
306 Foreign Loss Recapture
307 Consolidated Tax Return Problems
308 Investment Tax Credit Recapture
309 Deferred Cancellation of Debt Income
310 Analysis of Alternatives
311 Practice Aids
Tax Years of S Corporations
401 Overview
402 Required and Permitted Years
403 Fiscal Years with Business Purpose
404 Section 444 Years
405 Restrictions on Tiered Structures
406 Changing Taxable Years after the S Election Takes Effect
407 Loss of S Election for Failure to Change Taxable Year
408 Decision Flowcharts
Corporate and Shareholder Elections
501 Overview
502 Relationship of Eligibility Rules and the Election
503 S Corporation Election Procedures
504 Timing of the S Election
505 Election After Prior Termination
506 Shareholder Consent
507 Taxable Year Election
508 Separate Trust Elections
509 Election for Qualified Subchapter S Subsidiary
510 Relief for Late and Defective Elections
511 Practice Aids
Income Measurement and Reporting
601 Overview
602 Measurement of Income and Deductions
603 Tax and Accounting Problems with Special S Corporation Rules
604 Classification and Reporting of Separate Items
605 Net Investment Income
606Qualified Business Income
607 Special Income and Loss Problems
608 Allocation of Items to Shareholders
609 Shareholder Loss Limitations
610 Treatment of Suspended Losses on Disposition of Stock
611 Reporting Requirements
612 Statute of Limitations for Adjustment of Shareholder Tax Liability
613 Practice Aids
Distributions of Cash and Property
701 Overview
702 Background
703 Corporations with No Accumulated Earnings and Profits
704 Corporations with Accumulated Earnings and Profits
705 Previously Taxed Income
706 Property Distributions
707 Accounting and Reporting of Distributions
708 Elections to Distribute Accumulated Earnings and Profits
709 Distributions during the Post-Termination Transition Period
710Eligible Terminated S Corporation
711 Distributions on Bank Directors' Shares
712 Distribution Planning Opportunities
713 Summary Flowcharts
714 Practice Aids
Corporate-Shareholder Transactions
801 Overview
802 Constructive Distributions
803 Expenses Accrued to Shareholders
804 Direct Compensation of Shareholders
805 Special Subchapter S Fringe Benefit Rules
806 Business Expenses of Shareholder-Employees
807 Sales of Property between Corporations and Shareholders
808 Rentals of Property between a Shareholder and the Corporation
809 Interest on Loans between the Corporation and Its Shareholders
810 Practice Aids
Shareholder Stock Basis and Debt Basis
901 Overview
902 Historical Basis
903 Debt Basis, In General
904 IRS Positions and Litigation on Debt Basis
905 Basis Regulation Section 1.1366-2
906 Adjustments to Stock Basis
907 Adjustments to Debt Basis
908 Repayment of a Reduced-Basis Loan
909 Miscellaneous Basis Problems
910 Additional Loss Limit Concerns
911 Practice Aids
Integration of Loss Limits
1001 Overview
1002 Background
1003 Corporate-Level Limits
1004 Limitations Imposed on Shareholders by Subchapter S
1005 Effects of the At-Risk Rules
1006 Passive Activity Loss Limits
1007Limitation on Excess Business Losses
1008 Investment Interest
1009 Capital Loss Limits
1010 Charitable Contributions
1011 State and Local Income Taxes
1012 Miscellaneous Expenses
1013Net Operating Loss Rules
1014 Summary of Loss Limits
1015 Practice Aids
Tax on Built-In Gains
1101 Overview
1102 Background
1103 Recognition Period
1104 Net Unrealized Built-in Gain
1105 Net Recognized Built-in Gain
1106 Computation of Tax
1107 Other Computations
1108 Extensions of the Rules
1109 Problem Areas
1110 Interaction of Multiple Taxes on an S Corporation
1111 Planning Techniques
1112 Anti-Avoidance Rules
1113 Transitional Rules
1114 Summary
1115 Practice Aids
Passive Investment Income
1201 Overview
1202 Definitions of Passive Investment Income
1203 Passive Income Tax
1204 Interaction of Passive Investment Income Tax with Other Taxes
1205 Termination of S Election Due to Excess Passive Income
1206 Planning Strategies
1207 Practice Aids
Termination of the S Election
1301 Overview
1302 Voluntary Terminations
1303 Termination by Operation of Law
1304 S Termination Year Defined
1305 Corporate Treatment of the S Termination Year
1306 Shareholder Treatment of the S Termination Year
1307 Accounting for the S Termination Year
1308 Post-Termination Transition Period
1309 Planning Strategies for an S Termination Year
1310 Inadvertent Termination Relief
1311 Practice Aids
S Corporations and Related Entities
1401 Overview
1402 S Corporation within a General Business Structure
1403 Qualified Subchapter S Subsidiaries
1404 Practice Aids
Capital Structure of the S Corporation
1501 Overview
1502 General Applicability of Subchapter C
1503 Contributions of Property to the Corporation
1504 Contributions to the Corporation's Capital
1505 Debt and Equity Classification Problems
1506 Special S Corporation Problems
1507 Section 1244 Stock
1508 Practice Aids
Stock Redemptions and Complete Liquidations
1601 Overview
1602 Stock Redemptions
1603 Effects of a Redemption on the Corporation
1604 Planning Strategies for Redemptions
1605 Corporate Liquidations
1606 Practice Aids
Purchase and Sale of S Corporations
1701 Overview
1702 Basic Transactions Covered
1703 Background Rules
1704 Allocation of Consideration for a Going Concern
¶1705 Taxable Exchange of Corporation's Assets
1706 Taxable Exchange of Stock
1707 Stock Deal Treated as Asset Exchange for Federal Income Tax Purposes
1708 Practice Aids
Tax-Free Reorganizations
1801 Overview
1802 Transactions Qualifying as Reorganizations
1803 Applicability to S Corporations
1804 Description of Reorganizations
1805 General Reorganization Rules
1806 Tax Consequences of Acquisitive Reorganizations
1807 Divisive Reorganizations
1808 Practice Aids
Estate Planning for S Corporation Shareholders
1901 Overview
1902 Family Financial Planning Objectives, In General
1903 Transfer Taxes, In General
1904 Special Problems of the Closely Held Business
1905 Special Considerations for S Corporations
1906 Planning for the Family to Retain the Business
1907 Planning for the Estate to Dispose of the Business
1908 Practice Aids
Trusts as S Corporation Shareholders
2001 Overview
2002 Grantor Trusts
2003 Deemed Grantor Trusts (Beneficiary-controlled Trusts)
2004 Grantor and Deemed Grantor Trust after the Death of the Owner
2005 Testamentary Trusts
2006 Qualified Subchapter S Trusts
2007 Electing Small Business Trusts
2008 Conclusion
2009 Practice Aids
S Corporation Problems: Financial Distress Issues
2101 Introduction
2102 Bankruptcy, In General
2103 Status of S Corporation Election
2104 Dealings with the Corporation during Shareholder Bankruptcy
2105 S Corporation Income and Losses in Year of Shareholder Bankruptcy
2106 Bankruptcy of S Corporation: Income and Losses
2107 Cancellation of Debt, in General
2108 Income Tax Consequences of Debt Reduction, In General
2109 Debtor Attribute Reduction In General
2110 Treatment of Cancellation of Debt Income of Shareholders
2111 Treatment of Cancellation of Debt Income of S Corporations, before 2002
2112 Treatment of Cancellation of Debt Income of S Corporations, 2002 and Later Years
2113 Special Considerations for Exiting a Troubled Corporation
2114 Practice Aids
Table of Internal Revenue Code Sections
Table of Treasury Regulations
Table of Internal Revenue Releases
