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 regarding S corporate taxation. Code Sec. 199A generally allows shareholders of an S corporation a 20% deduction on S corporation income with special rules for tangible property acquisitions. Because there were ambiguities in the statute, Treasury has issued a series of regulations to interpret Code Sec. 199A. This edition provides an extensive discussion of the regulations, with many examples to explain the operation of Code Sec. 199A.
This book covers all the salient issues involving S Corporations. To assist the reader, tax planning situations are presented throughout the book.
This book is organized into twenty-two chapters. With this update, we have reorganized many of the chapters so that topics such as elections and terminations, corporate-level taxes, shareholder eligibility and distributions are grouped together. Chapter 1 discusses the tax considerations in electing S corporation status, as well as the advantages and disadvantages of S corporation taxation. Chapters 2-10 detail operations of an S corporation, discussing the statutory requirements to be an S corporation, the types of taxpayers who can qualify as shareholders, considerations that one must make before converting a C corporation to S status and the details of making a proper election, tax years of S corporations, income measurement and reporting, and the making of distributions, etc. Chapter 11 sets forth shareholder stock basis and debt basis. Chapter 12 covers loss limits.
Chapter 13 provides the reader with coverage of financial distress issues. Chapter 14 discusses built-in gains, Chapter 15, LIFO recapture tax, Chapter 16, passive and investment income, Chapter 17, related entities, Chapter 18, capital structure, Chapter 19, stock redemptions and liquidations, Chapter 20, purchase and sale of S corporations, Chapter 21, tax-free reorganizations and Chapter 22, estate planning for S corporation shareholders.
This work uses extensive examples to illustrate both simple and complex situations. In areas where authorities do not provide clear guidance, the author constructs plausible courses of action, with appropriate analysis. Although this treatise focuses primarily on the rules of Subchapter S of the Internal Revenue Code, it also integrates these rules with other portions of the tax law, which can have important effects on S corporations and their shareholders.
At the end of each chapter are pertinent checklists, worksheets, selected tax forms and sample election letters.
Table of Contents:
1
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 Conversion of Existing Corporation
114 Possible Secondary Costs of Making S Election
115 Analysis of Alternatives
116 Proposals for Statutory Change
117 Practice Aids
Appendix 1-1 User Fees Applicable to Problems Discussed in S Corporation Taxation
2
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
3
Trusts as S Corporation Shareholders
301 Overview
302 Grantor Trusts
303 Deemed Grantor Trusts (Beneficiary-Controlled Trusts)
304 Grantor and Deemed Grantor Trust after the Death of the Owner
305 Testamentary Trusts
306 Qualified Subchapter S Trusts
307 Electing Small Business Trusts
308 Voting Trusts
309 Conclusion
310 Practice Aids
4
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
5
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
6
Termination of the S Election
601 Overview
602 Voluntary Terminations
603 Termination by Operation of Law
604 S Termination Year Defined
605 Corporate Treatment of the S Termination Year
606 Post-Termination Transition Period
607 Eligible Terminated S Corporations
608 Inadvertent Termination Relief
609 Practice Aids
7
S Corporation Income Measurement and Reporting
701 Overview
702 Measurement of Income and Deductions
703 General Methods of Accounting
704 Business Interest Deduction Limit
705 Tax and Accounting Problems with Special S Corporation Rules
706 Credits
707 Classification and Reporting of Separate Items
708 Special Income and Loss Problems
709 Allocation of Items to Shareholders
710 Special Accounting Rules for Conversion of C Corporation to S Status
711 Special Accounting Rules for an S Termination Year
712 Reporting Requirements
713 Penalties Imposed on S Corporations and Shareholders
714 Practice Aids
8
Shareholder Income Effects and Reporting Requirements
801 Overview
802 Shareholder Effects of S Corporation Income and Other Items
803 Net Investment Income
804 Qualified Business Income
805 Special Income and Loss Problems
806 Timing of Shareholder Reporting
807 Shareholder Treatment of the S Termination Year
808 Shareholder Loss Limitations
809 Treatment of Suspended Losses on Disposition of Stock
810 Penalties Imposed on Shareholders
811 Statute of Limitations for Adjustment of Shareholder Tax Liability
9
Distributions of Cash and Property
901 Overview
902 Background
903 Corporations with No Accumulated Earnings and Profits
904 Earnings and Profits
905 Distributions from Corporations with Accumulated Earnings and Profits
906 Previously Taxed Income
907 Property Distributions
908 Accounting and Reporting of Distributions
909 Elections to Distribute Accumulated Earnings and Profits
910 Distributions during the Post-Termination Transition Period
911 Eligible Terminated S Corporation
912 Distributions on Bank Directors' Shares
913 Distribution Planning Opportunities
914 Summary Flowcharts
915 Practice Aids
10
Corporate-Shareholder Transactions
1001 Overview
1002 Constructive Distributions
1003 Expenses Accrued to Shareholders
1004 Direct Compensation of Shareholders
1005 Special Subchapter S Fringe Benefit Rules
1006 Business Expenses of Shareholder-Employees
1007 Sales of Property between Corporations and Shareholders
1008 Rentals of Property between a Shareholder and the Corporation
1009 Interest on Loans between the Corporation and Its Shareholders
1010 Practice Aids
11
Shareholder Stock Basis and Debt Basis
1101 Overview
1102 Historical Basis
1103 Debt Basis, In General
1104 IRS Positions and Litigation on Debt Basis
1105 Basis Regulation Section 1.1366-2
1106 Adjustments to Stock Basis
1107 Adjustments to Debt Basis
1108 Repayment of a Reduced-Basis Loan
1109 Miscellaneous Basis Problems
1110 Additional Loss Limit Concerns
1111 Practice Aids
12
Integration of Loss Limits
1201 Overview
1202 Background
1203 Corporate-Level Limits
1204 Limitations Imposed on Shareholders by Subchapter S
1205 Effects of the At-Risk Rules
1206 Passive Activity Loss Limits
1207 Limitation on Excess Business Losses
1208 Investment Interest
1209 Capital Loss Limits
1210 Charitable Contributions
1211 State and Local Income Taxes
1212 Miscellaneous Expenses
1213 Net Operating Loss Rules
1214 Summary of Loss Limits
1215 Practice Aids
13
S Corporation Problems: Financial Distress Issues
1301 Introduction
1302 Bankruptcy, In General
1303 Status of S Corporation Election
1304 Dealings with the Corporation during Shareholder Bankruptcy
1305 S Corporation Income and Losses in Year of Shareholder Bankruptcy
1306 Bankruptcy of S Corporation: Income and Losses
1307 Cancellation of Debt, in General
1308 Income Tax Consequences of Debt Reduction, In General
1309 Debtor Attribute Reduction In General
1310 Treatment of Cancellation of Debt Income of Shareholders
1311 Treatment of Cancellation of Debt Income of S Corporations before 2002
1312 Treatment of Cancellation of Debt Income of S Corporations, 2002 and Later Years
1313 Special Considerations for Exiting a Troubled Corporation
1314 Practice Aids
14
Tax on Built-In Gains
1401 Overview
1402 Background
1403 Recognition Period
1404 Net Unrealized Built-in Gain
1405 Net Recognized Built-in Gain
1406 Computation of Tax
1407 Other Computations
1408 Extensions of the Rules
1409 Problem Areas
1410 Interaction of Multiple Taxes on an S Corporation
1411 Planning Techniques
1412 Anti-Avoidance Rules
1413 Transitional Rules
1414 Summary
1415 Practice Aids
15
LIFO Recapture Tax
1501 Overview
1502 Calculation of Income and Incidence of Tax
1503 Accounting for Inventory after the S Election
1504 Effects of Incorporations, Reorganizations ad Liquidations
1505 Imposition of Penalties and Interest
16
Passive Investment Income
1601 Overview
1602 Definitions of Passive Investment Income
1603 Passive Income Tax
1604 Interaction of Passive Investment Income Tax with Other Taxes
1605 Termination of S Election Due to Excess Passive Income
1606 Planning Strategies
1607 Practice Aids
17
S Corporations and Related Entities
1701 Overview
1702 S Corporation within a General Business Structure
1703 Qualified Subchapter S Subsidiaries
1704 Practice Aids
18
Capital Structure of the S Corporation
1801 Overview
1802 General Applicability of Subchapter C
1803 Contributions of Property to the Corporation
1804 Contributions to the Corporation's Capital
1805 Debt and Equity Classification Problems
1806 Special S Corporation Problems
1807 Section 1244 Stock
1808 Practice Aids
19
Stock Redemptions and Complete Liquidations
1901 Overview
1902 Stock Redemptions
1903 Effects of a Redemption on the Corporation
1904 Planning Strategies for Redemptions
1905 Corporate Liquidations
1906 Practice Aids
20
Purchase and Sale of S Corporations
2001 Overview
2002 Basic Transactions Covered
2003 Background Rules
2004 Allocation of Consideration for a Going Concern
2005 Taxable Exchange of Corporation's Assets
2006 Taxable Exchange of Stock
2007 Stock Deal Treated as Asset Exchange for Federal Income Tax Purposes
2008 Practice Aids
21
Tax-Free Reorganizations
2101 Overview
2102 Transactions Qualifying as Reorganizations
2103 Applicability to S Corporations
2104 Description of Reorganizations
2105 General Reorganization Rules
2106 Tax Consequences of Acquisitive Reorganizations
2107 Divisive Reorganizations
2108 Practice Aids
22
Estate Planning for S Corporation Shareholders
2201 Overview
2202 Family Financial Planning Objectives, In General
2203 Transfer Taxes, In General
2204 Special Problems of the Closely Held Business
2205 Special Considerations for S Corporations
2206 Planning for the Family to Retain the Business
2207 Planning for the Estate to Dispose of the Business
2208 Practice Aids
