- The IRS clarified the requirements that must be met for a 2% shareholder-employee of an S corporation to deduct medical insurance premiums paid on his or her behalf by the S corporation.
- The Mortgage Forgiveness Debt Relief Act of 2007 included a new penalty for nontimely filing of an S corporation return.
- Two courts ruled on when an S corporation shareholder had transferred beneficial ownership of his shares in the S corporation.
- The IRS provided guidance on the need for an employer identification number for QSubs and corporations involved in certain F reorganizations.
This two-part article discusses recent legislation, cases, rulings, regulations, and other developments in the S corporation area. Part I covers operational issues, including new guidance on the treatment of medical insurance premiums for wholly owned S corporations, new built-in gain developments, and the impact of charitable giving by S corporations on shareholders’ adjusted basis in stock.1
During the period of this S corporation tax update (July 8, 2007–July 8, 2008), the 2008 Economic Stimulus Act has had an indirect impact on S corporation operations. Treasury also seems to have renewed its focus on employer/taxpayer identification numbers. The Mortgage Forgiveness Relief Act of 2007 enacted a penalty provision that tax practitioners must be aware of regarding timely filing of S corporation tax returns and information included therein.
An unusual number of court cases involved beneficial ownership of S corporations and when that ownership terminates. The IRS issued a ruling on the exploitation of mineral rights and its impact on Sec. 1374 built-in gains. The potential zero capital gain rate for 2008 and 2009 is an attractive tax planning tool that may affect S corporations and their shareholders’ behavior.
S Corporation GrowthThe past 20 years have seen an explosive growth in S corporation filings. The latest IRS Statistics of Income Bulletin (Spring 2008) shows that S corporations continue to be the most common business entity.2 For the 2006 tax year there were over 3.3 million S corporation tax returns filed, accounting for 61.9% of all corporate returns filed. There were 343,000 first-time S corporation tax forms filed, of which 253,000 were newly incorporated entities and 90,000 were converted C corporations.
While the number of S corporations has greatly increased, the audit rate on S corporations and their shareholders has held relatively steady. In March 2008, the IRS published its data book on audit rates for the October 2006–September 2007 fiscal year.3 Of 134.5 million individual returns filed, 1,380,000 individuals, or about 1%, were audited. Of this 1%, almost half were earned income tax credit audits and only 23% were by revenue agents. For individuals whose total positive income (TPI) was greater than $200,000 but less than $1 million, the audit rate was 2%. If the taxpayer’s income was within those parameters and a business return (Schedule C) was also filed, the audit rate went up to 2.9%. If TPI was greater than $1 million, the audit rate was 9.3%.
On the other hand, S corporations were audited at a rate of .5% (up from .38% the year before), while for partnerships and LLCs the figure was .4% (up from .36%). To put this in perspective, C corporations with less than $10 million in assets were audited at a .9% rate. These findings were highlighted in the National Taxpayer Advocate’s 2007 Annual Report to Congress, in which she pointed out that in fiscal year 2006, an S corporation was half as likely to be audited as a C corporation (4 out of 1,000 versus 8 out of 1,000, respectively).4
Zero Capital Gains Rate in 2008Because the capital gains rate for individual taxpayers in the lower two tax brackets went to zero in 2008, many taxpayers are (or were) making gifts of appreciated stock (including S stock) to their children, grandchildren, or parents. In 2008, the new law extends the “kiddie tax” to the income (including capital gains and dividends) of 18-year-olds who do not provide more than half of their own support and to 19- to 23-year-olds who are fulltime students and do not provide more than half of their own support.5 Thus, the 0% tax rate generally will not be available to students through age 23 unless they have significant earned income or possibly trust fund income that contributes to their own support.
This leads to a balancing act. Parents may hire a child to legitimately work for them and pay him or her enough to meet the 50% self-support test but not so much that the child’s income exceeds the first two bracket limits ($32,550), including the capital gains generated. The parent will also lose the dependency exemption.
Example 1: Child C, age 22, is in graduate school and has $5,000 dividend income and $2,000 ordinary income from an S corporation, plus $10,000 earned income from summer work and from helping his parents with computer work in their business. His total support is $18,000. In February 2008, C’s parents give him stock worth $24,000, with a basis of $4,000 and a holding period of at least one year. He has a standard deduction and personal exemption that put his 2008 taxable income in the first two tax brackets. Assuming that C sells the stock in 2008, he will pay no tax (0% tax rate) on the $20,000 capital gain and the $5,000 dividend income, for a tax savings over his parents’ hypothetical tax on the dividend and capital gains of $3,750 ($25,000 × 15%).
Example 2: A retired married couple deferred pension distributions and invested primarily in tax-exempt bonds, and they are living off that interest. Their S corporation K-1 shows ordinary income of $40,000, and they receive distributions of $50,000 during the year. They file jointly and have itemized deductions of $30,000. Their net ordinary income is $10,000 (40,000 – 30,000). Therefore, if they recognized $200,000 in capital gains or dividend income through the S corporation or otherwise, $55,100 of the gain (assuming a $65,100 limit for the first two brackets) would be subject to a 0% tax rate. The other $144,900 would be subject to the normal 15% tax rate. This results in a federal tax savings of $8,265.
Alternative Minimum TaxAt the entity level, an S corporation generally does not have to worry about the alternative minimum tax (AMT), but its shareholders definitely do. The Tax Relief and Health Care Act of 20066 allows 20% of long-term unused minimum tax credits (MTCs) (i.e., those older than three years) to be refundable credits if the taxpayer’s adjusted gross income (AGI) is below the personal exemption phaseout threshold, beginning in 2007 and ending in 2012.7 If AGI is above this level, the refundable credit is phased out in the same manner as the personal exemption.
Tax professionals should make sure that their clients’ AGI, including income from flowthrough entities such as S corporations, is below the threshold. Note that the long-term unused MTC concept is a rolling computation of the MTCs that arose more than three years ago. Thus, 2007 AMT and regular tax may be offset by MTCs that arose before 2004. Long-term unused MTCs for 2008 would include 2004’s MTC because it is now more than three years old.
Example 3: Coming into 2008, taxpayer N has a $300,000 MTC from the exercise of incentive stock options in 2001, and her 2008 AGI is $220,000. In 2008, her regular tax is $35,000 and her AMT tentative minimum tax is $25,000. Normally N would be able to use $10,000 of her $300,000 MTC against her regular tax (the amount by which her regular tax exceeds the AMT tentative minimum tax). New Sec. 53(e) allows a credit of $60,000 ($300,000 × 20%) to offset regular tax and AMT, which results in a cash refund of $25,000 ($60,000 – $35,000). N carries over $240,000 ($300,000 – $60,000) of the long-term unused MTC to 2009. If N had an MTC from 2005, it would be added to N’s long-term unused MTCs for 2009.
2008 Economic Stimulus ActIn January 2008 President Bush signed the Economic Stimulus Act,8 which is best known for the $600 stimulus checks distributed to lower- and middle-income taxpayers in spring and summer 2008. Receiving much less fanfare but probably more important for small businesses is a large tax cut involving an expanded Sec. 179 expense deduction provision as well as first-year bonus depreciation.9 Under these new rules, which apply only to assets placed in service in 2008,10 Sec. 179 limits are increased to $250,000 for new or used tangible personal property and shrink-wrap software, and the phaseout threshold is raised to $800,000.
Example 4: In 2008, S, an S corporation, places in service $600,000 of equipment with a five-year class life. S may pass through to its shareholders $250,000 of its Sec. 179 deduction and $210,000 of its bonus and regular depreciation.11 Thus, the combination of Sec. 179, bonus, and modified accelerated cost recovery system (MACRS) depreciation results in 77% of the asset being depreciated in the year placed in service. The shareholders would reflect their share of the $250,000 Sec. 179 deduction on their individual tax returns, but not the $600,000 asset acquisitions for the threshold limit. Also note that the shareholders and S each must have sufficient trade or business income (including salary) to use their Sec. 179 amount.An interesting, related side issue that the S corporation tax adviser must be aware of is that in Example 4, if S were owned by the same people that owned a C corporation, the rules of Secs. 1561 and 1563 as well as Sec. 179(d)(6) would not apply because the S corporation is an excluded corporation for purposes of “component members of a controlled group.”12 This means that a related C corporation can use the full Sec. 179 $250,000 expensing amount, and the S corporation shareholders may also benefit from Sec. 179 to the extent of an additional $250,000, assuming sufficient business income.
Sole Shareholder S Corporation and Medical Insurance Premium TreatmentThere has been recent concern about the proper treatment under Sec. 162(l) of medical insurance premiums paid by an S corporation for a sole shareholderemployee and his or her spouse or dependents.13 In Notice 2008-1,14 which has retroactive application, the IRS clarifies that if the medical insurance premiums are paid by the S corporation on behalf of the shareholder-employee or reimbursed by the S corporation to the shareholder- employee for premiums paid at the individual level, then the amount of the premiums is fully deductible above the line if they are included in the shareholder- employee’s income.
However, the sole shareholder-employee can only deduct the premiums above the line if his or her W-2 issued by the S corporation in the year the premiums are paid includes the premium payments or reimbursements in wages and the shareholder-employee reports them as gross income on his or her income tax return in the year they are paid. Note that the premiums included in income are not subject to Social Security tax.
If an amended return is necessary to reflect the notice’s impact retroactively, a note at the top of Form 1040X, Amended U.S. Individual Income Tax Return, or Form 1045, Application for Tentative Refund, should read “Filed Pursuant to Notice 2008-1.” The spring 2008 Statistics of Income Bulletin points out that one-third of all S corporation tax returns showed only one shareholder. Thus, Notice 2008-1 has widespread application.
Charitable Contribution of Appreciated Property and Stock BasisRev. Rul. 2008-1615 was issued to clarify the adjustments to S stock basis for the contribution of appreciated property by an S corporation to a qualified charitable organization. Technically, these rules apply only to 2006 and 2007,16 but a provision in the tax extender bill (S. 3335) weaving its way through Congress may extend this treatment. If it is not extended, it is still important in accurately reflecting appreciated charitable gifts made in 2007 on Schedule K and the K-1s issued in 2008.
Essentially, the treatment is that a shareholder’s adjusted basis in stock is increased by the appreciation embedded in the gifted property and is then reduced by the fair market value (FMV) of the property gifted (but not below zero).17 It should be noted that the charitable contribution is still subject to Sec. 1366(d) limitations and Sec. 170 50% or 30% AGI limits.
Example 5: Y, an S corporation, is owned by B, its sole shareholder. B has an adjusted basis of $1,000 in Y stock. In 2007, B contributes appreciated long-term capital gain property worth $500 with an adjusted basis of $200. The charitable gift will be reflected on Schedules K and K-1 and will be deductible on B’s individual tax return to the extent of the $500 FMV. The $1,000 adjusted basis in B’s stock will be reduced by $200 (the gifted property’s adjusted basis). Another way to view this transaction would be to increase adjusted basis by the appreciation in the gifted property to $1,300 ($1,000 + $300) and then reduce it by $500, the FMV of the gift, to $800.
Example 6: Assume the same facts as in Example 5, except that B’s adjusted basis in Y stock is $150. After the charitable gift is reflected, his basis in the stock will be zero. B would have a $500 Sec. 170 deduction flow through to the individual tax return, but Sec. 1366(d) would limit his deduction to $450 ($150 basis + $300 appreciation), and $50 would be suspended until there was sufficient basis.
Example 7: Assume the same facts as in Example 5, except that B’s basis in Y stock is $0. B currently deducts $300 (the appreciation) as a Sec. 170 expense; his adjusted basis in Y stock remains at $0, and he has a suspended $200 charitable contribution deduction.
Beneficial Interest in an S CorporationThis year there were several cases involving decisions as to when ownership of an S corporation ends if there are disputes and disagreements between the parties. Dunne 18 involved a taxpayer who was for most of an S corporation’s life the sole shareholder. For various reasons he brought in a 50% shareholder. After several years they had disputes and disagreements about the future direction of the company. The option of Dunne’s selling his half to the new shareholder was informally discussed in 1996, but no agreement as to price or other terms was negotiated at that time. In January 1997, Dunne rejected the price offered, and he continued to receive distributions and shared in the economic benefits and burdens of the S corporation. He also held himself out to be the chairman of the board and secretary.
In early 1997, the other shareholder fired Dunne as an employee, and in May 1997 they came to a formal agreement on the buyout price, including a portion of the price determined by future revenue from a particular government contract. Even after the May 1997 agreement, Mr. Dunne continued to represent himself to third parties as an officer and owner of the company. The Tax Court held that May 1997 was when the economic benefits and burdens of Dunne’s ownership were terminated and therefore only the K-1 income through May was taxable to Dunne.
Hightower 19 is another case dealing with beneficial ownership. Two 50-50 shareholders of a software S corporation had a dispute that resulted in Mr. Hightower being forced to resign as chairman of the board and losing management control of the company. The other shareholder offered and paid him $47 million, per the company’s buy-sell agreement. Even though Hightower still was fighting the arbitration decision in state court, he took the sale proceeds. The court ruled that Hightower was no longer a shareholder as of October 2000 when he surrendered his stock and accepted payment.
In an extreme abusive version of the beneficial ownership issue, Julie McCammon20 was a physician who conducted business as a solely owned S corporation. In one year she earned $380,000 in income before owner’s salary and paid herself $190,000, for which she filed a W-2. The other $190,000 was reflected on her Schedule K-1. She argued that she had no “income in a constitutional sense” and reported none of the income earned by her S corporation or the salary paid by her S corporation. (She also argued in court that the Code is “too complex.”) The judge threw the book at her, imposing a frivolous claim penalty of $25,000 and various other penalties.
Sec. 1374 Built-in GainWith many companies having converted from C to S status, one of the more important and complicated provisions that needs to be addressed and planned for is the Sec. 1374 built-in gain (BIG) tax rules. This year the Service issued Letter Ruling 200821022,21 which is the latest in a series of letter rulings that deal with mineral or timber rights and whether their exploitation is subject to Sec. 1374. Regs. Sec. 1.1374-4(a)(3) distinguishes a working interest in oil and gas property from the selling of the oil or gas itself. Under the regulation, the sale of the oil (as opposed to the sale of the working interest) is not subject to BIG tax. Rev. Rul. 2001-5022 extended this regulation’s holdings to timber interests. In Letter Ruling 200821022, an S corporation (formerly a C corporation) owned several mines with different mineral deposits. In the ruling, it was held that Sec. 1374 did not apply to the ore that came from the mine and that was transformed into other products.
On the other hand, MMC Corporation 23 involved a C corporation required by a tax law change to make a Sec. 481 adjustment that was spread over four years. Before the four-year period had elapsed, MMC switched to S status. The Tax Court held that the unrecognized Sec. 481 adjustment was subject to Sec. 1374 BIG treatment.
Key-Person Life Insurance and AAARev. Rul. 2008-4224 was issued to clarify the treatment of key-person life insurance proceeds and premiums on the accumulated adjustment account (AAA). Essentially the ruling held that neither taxexempt income (here, the death benefits paid on a life insurance policy) nor the expense related to a tax-exempt income item (the insurance premiums paid) will affect the AAA under Sec. 1368(e)(1)(A). The practitioner should note that some tax commentary had suggested that the insurance premium should reduce AAA. If that advice was followed, the client may consider amending open-year returns as to the character of distributions paid or at the very least modifying the AAA.
FIN 48 and Private CompaniesThe Financial Accounting Standards Board (FASB) postponed for one year for private companies the effective date of complying with FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, until periods beginning after December 15, 2007. This means that for 2008, these rules will affect GAAP financial statements for private companies. Generally, Financial Accountings Standard No. 109 (FAS 109), Accounting for Income Taxes, and FIN 48 will not affect S corporations because the tax liability is incurred at the shareholder level. However, if the company has a corporate level tax, such as on Sec. 1374 built-in gain, it would be subject to these complicated rules. class="Sect">
Losses and LimitationsA major motivation for a corporation choosing S status is the ability to flow entity-level losses through to its shareholders. There are several hurdles that a shareholder must overcome before losses are deductible, including Sec. 183 (hobby loss), Sec. 1366 (adjusted basis), Sec. 465 (at risk), and Sec. 469 (passive activity loss) rules. Several recent cases and rulings involved these loss limitations.
Open Account LoansAs previously discussed in the 2006 and 2007 S corporation current development articles,25 the Brooks 26 case involved open account debt. Specifically, two brothers owned an S corporation and lent it money on open account.27 In year 1, the brothers advanced $1 million to the corporation, and in January of year 3 it repaid the advance. In December of year 3, the brothers advanced $1.6 million, which the corporation repaid in January of year 4. In December of year 4, the brothers advanced $2.2 million. Thus, at the end of any given year, the shareholders had basis in the loans so that they could deduct the S corporation’s losses.
The IRS maintained that the debt repayments should be treated separately, like notes, so that the repayment resulted in income to the brothers at the time of the repayment, when the loan basis was zero. The court held that no income recognition was required because the loans were open advances.
Treasury is unhappy with this court holding and has issued proposed regulations to limit the amount of debt treated as open account debt to $10,000. Interestingly, these were not issued as temporary regulations. The government is currently soliciting various interested parties, including the ABA and the AICPA, on the impact of a $10,000 open debt limit.
Guarantees and Co-BorrowingIt is clear from the consistent holdings of numerous courts that guarantees or co-borrowing will not give rise to basis for loss under the economic outlay concept adopted by the courts. In Rose,28 the Eleventh Circuit heard the taxpayer’s appeal of the verdict in PK Ventures.29 The appeals court, reversing the Tax Court decision, held that the taxpayer’s debt substitution transactions with two S corporations he owned constituted actual economic outlays and remanded the case for further consideration of their effect on the taxpayer’s basis in the S corporations.
Secs. 1366(d) and 469Bilthouse 30 involved the issue of when a company’s stock becomes worthless and therefore triggers Sec. 165(g) and disposition of a passive activity for Sec. 469 purposes. The Bilthouses were in the heavy construction industry, building large projects for municipalities in Florida. They contributed $500,000 to an S corporation and in 1995 had huge losses that caused the company to become insolvent. In 1997, they claimed that the company was now worthless and wanted to take their suspended losses. Under the Gitlitz 31 doctrine, they increased their basis for debt forgiveness and took large losses. The government successfully argued that the company was worthless in 1995 and that therefore the losses were not allowed in 1997. When in doubt about worthlessness, a practitioner must decide whether losses should be taken in the earliest possible year to avoid tolling the statute of limitation.
Technical Advice Memorandum (TAM) 20074701832 involves the leasing of heavy trucks and trailers from one qualified subchapter S subsidiary (QSub) to another. The leases were made with terminal rental adjustment clauses, which under Sec. 7701(h) made them operating leases, rather than the taxpayer’s position that they should be financing leases and thus not rental income.
The IRS held that this was a rental activity under Sec. 7701(h), which normally means it would be limited by the Sec. 469 limitations. However, because the S corporation had the same proportionate ownership interest in all the activities under Regs. Sec. 1.469-4(d)(1)(C), it could aggregate all the different business activities. It is unclear why the lease itself was not ignored because the QSub, for all income tax purposes, is the same as the S corporation; thus, the company was renting to itself. Nonetheless, the result was that all the active and rental activities could be netted.
Employer Identification NumbersThe government seems fixated on the proper treatment of employer identification numbers (EINs). T.D. 935633 revoked Notice 99-6,34 which had allowed an S corporation and its QSub to either use the parent S corporation’s EIN or have each use its own EIN. Effective for wages paid on January 1, 2009, onward, each company must use its own EIN.
In Rev. Rul. 2008-18,35 Treasury addressed the treatment of EINs when an F reorganization is effectuated with an S corporation and its QSub. That ruling pointed out that Regs. Sec. 310.6109-1(i)(1) modified the taxpayer identification reporting rules so that Example (3) of Rev. Rul. 73- 52636 is no longer applicable. Rev. Rul. 2008-18 presented two scenarios and discussed the requirements for EINs.
Scenario 1: B, an individual, owned 100% of Y, an S corporation. B contributed the Y stock into N, a newly formed entity, and immediately elected QSub status for Y. The next year, N sold 1% of Y stock so that its status was broken and it would become a C corporation. The ruling held that, consistent with Rev. Rul. 64-250,37 N must get its own EIN and the old S corporation (Y) keeps its own EIN.
Scenario 2: The facts are a little more complicated, but essentially B owns 100% of Z, an S corporation. B wants to get to the same place as in scenario 1 but does so by setting up an N QSub of Z and a QSub of that N subsidiary. Through the merger and F reorganization statutes, B will own N, which will own Z (which will be a QSub). Again, Z keeps its EIN number and N must file to receive a new EIN.
Penalties for Nontimely Filing of 1120S Tax Return InformationIn what will probably be a surprise to many tax practitioners, the Mortgage Forgiveness Debt Relief Act of 200738 enacted a new provision, Sec. 6699, that imposes a penalty of $85 per shareholder per month (not to exceed 12 months) if the S corporation does not timely file its corporate return or fails to provide information required on the return. This would seem to be going after tax protesters, but in the one tax protester case discussed above (McCammon), the corporation filed all the relevant information in a timely manner but the shareholder did not include it in income. Thus, this new penalty provision would not apply even to an obviously abusive situation.
The law is effective for returns required to be filed after December 20, 2007, and is imposed on the S corporation. For purposes of calculating the amount of the penalty, a husband and wife count as two shareholders, and when one shareholder sells his or her interest to someone else, they count as two different shareholders.39 It is unclear how the law would treat community property state ownership where actual ownership may be in one person’s name.
Example 8: Husband and wife M and F and their two children own 100% of the stock of XYZ Corp. In October 2008, the two children gift some stock to their spouses. In 2009, the S corporation forgets to include the distribution amount on Schedules K and K-1 of the 2008 Form 1120S, U.S. Income Tax Return for an S Corporation. It could be liable for a penalty of $6,120 ($85 × 6 × 12) for this innocent mistake. The S corporation is liable and, even though M and F are considered to be one shareholder for the 100-shareholder requirement, each is treated as a separate shareholder for purposes of Sec. 6699.
Tax Return ExtensionsT.D. 9407 was issued as final and temporary regulations to reduce the automatic extension from six months to five for partnerships and trusts and estates, so September 15 partnership return K-1 information would give tax professionals time to file the individual investors’ Form 1040 by October 15. These new rules do not affect C or S corporations or individual tax return extension periods. The rules take effect for applications for extensions posted by July 1, 2008.
Bank Wants to Elect S StatusRev. Proc. 2008-1840 explains that when a bank wants to convert from C to S status, the Sec. 481 adjustment engendered by the mandatory switching from the reserve method of accounting for bad debts to the specific write-off method may be included in the last C corporation tax return rather than being spread over four years.41 Form 3115, Application for Change in Accounting Method, must be attached to both the last C year tax return and the first S year return.
Corporate LiquidationIf an S corporation owns or purchases 100% of another corporation, the subsidiary may be deemed liquidated under Sec. 338(h)(10) and become a QSub, which for tax purposes is treated as a branch or division of the S corporation. The subsidiary must be solvent for the Sec. 338(h)(10) rules to apply. In Chief Counsel Advice (CCA) 200818005,42 a subsidiary was technically insolvent before the liquidation (liabilities exceeded the FMV of its assets), but the parent corporation was going to convert debt into equity to rectify the problem per Rev. Rul. 78-330,43 where there was a good business reason for doing so. However, the CCA instead held that Rev. Rul. 68-60244 would be applied, which ignored the recapitalization of debt into equity immediately before the liquidation. This result would lead to a taxable event when the subsidiary was liquidated into the parent corporation upon a QSub election.
Corporate DivisonIn Letter Ruling 200809017,45 two families owned 50% each of an S corporation. The company had switched to S status more than 10 years before, and the business had been active for at least 5 years. In a Coady-type split-up of one business, the S corporation formed a subsidiary with half the net assets and distributed the subsidiary’s stock to one family, which gave back stock in the distributing corporation in a classic split-off. What was unusual about this Sec. 368(a)(1)(D) transaction was the business reason for the corporate division. In reading the ruling, one might expect that the rationale was a family feud, but instead it was a “fit and focus” rationale.46
In Letter Ruling 200826030,47 two families again owned 100% of the S stock and had a dispute as to the company’s future direction. They did a corporate split-off, and the business reason given to allow Sec. 355 to apply was a smorgasbord of rationales, including a shareholder dispute affecting the corporate operations, asset protection, and credit and working capital capabilities.
Stewart Karlinsky is a professor emeritus at San José State University in San José, CA, and a member of the AICPA Tax Division’s S Corporation Taxation Technical Resource Panel. Hughlene Burton is an associate professor in the Department of Accounting at the University of North Carolina– Charlotte in Charlotte, NC, and is the chair of the AICPA Tax Division’s Partnership Taxation Technical Resource Panel. For more information about this article, contact Dr. Karlinsky at firstname.lastname@example.org or Dr. Burton at email@example.com.
1 Part II will appear in the November 2008 issue.
2 Also see IR-2008-72 (5/23/08).
3 IRS Publication 55B, 2007 Data Book (March 2008); IR-2008-43.
4 The taxpayer advocate went on to report that in tax year 2005 almost 1 million S corporations with one shareholder paid no compensation to their owneremployees. She estimated that if the income had been earned in a Schedule C, almost $5 billion in self-employment tax would have been paid in.
5 This assumes that the children aged 19–23 are single. If they are married and file a joint return, the newly expanded kiddie tax will not apply.
6 Tax Relief and Health Care Act of 2006, P.L. 109-432.
7 Sec. 53(e).
18 Economic Stimulus Act of 2008, P.L. 110-185.
19 Sec. 168(k). The bonus depreciation rules are very closely modeled after the 2003 and 2004 stimulus rules.
10 In addition, certain binding contracts entered into in 2008 but delivered in 2009 are also covered by the Sec. 162(k) bonus depreciation rules.
11 600,000 – 250,000 = $350,000 × 50% = 175,000; asset basis is now $175,000 × 20% MACRS rate = $35,000 and a January 1, 2009, asset basis of $140,000.
12 See T.D. 9304 (12/22/06), Section 3.C, which clarifi es that because an S corporation is not subject to Sec. 11 tax rates, it is appropriate for it to be an excluded corporation.
13 See Burton, Karlinsky, and Wright, “[S Corporation] Current Developments (Part II),” 37 The Tax Adviser 672 (November 2006), for background on this issue, especially Chief Counsel Advice 200524001, which initially denied a sole S shareholder Sec. 162(l) above-the-line deduction treatment.
14 Notice 2008-1, 2008-2 I.R.B. 251.
15 Rev. Rul. 2008-16, 2008-11 I.R.B. 585.
16 Pension Protection Act of 2006, P.L. 109-280, Section 1203.
17 See Karlinsky and Brown, “S Corporations’ Charitable Contributions of Appreciated Property and Shareholders’ Adjusted Basis in S Stock,” 39 The Tax Adviser 183 (March 2008).
18 Dunne, T.C. Memo. 2008-63.
19 Hightower, No. 06-73838 (9th Cir. 2/12/08), aff’g T.C. Memo. 2005-274.
20 McCammon, T.C. Memo. 2008-114.
21 IRS Letter Ruling 200821022 (5/23/08).
22 Rev. Rul. 2001-50, 2001-2 C.B. 343.
23 MMC Corp. and Subsidiaries, T.C. Memo. 2007-354.
24 Rev. Rul. 2008-42, 2008-30 I.R.B. 175.
25 Burton, Karlinsky, and Wright, “[S Corporation] Current Developments (Part II),” 37 The Tax Adviser 670 (November 2006), and Karlinsky and Burton, “Current Developments in S Corporations (Part II),” 38 The Tax Adviser 677 (November 2007).
26 Brooks, T.C. Memo. 2005-204.
27 Under Regs. Sec. 1.1367-2(a), shareholder advances not evidenced by separate written instruments and repayments are referred to as open-account debt and are treated as a single debt.
28 Rose, No. 07-12245 (11th Cir. 4/24/08).
29 PK Ventures, Inc., T.C. Memo. 2006-36.
30 Bilthouse, No. 05 c 4442 (N.D. Ill. 9/28/07).
31 Gitlitz, 531 U.S. 206 (2001). Under Gitlitz, an insolvent S corporation’s Sec. 108 cancellation of indebtedness income increases a shareholder’s stock basis because it is tax-exempt income. The Gitlitz doctrine is not applicable to discharges of indebtedness after October 11, 2001, due to the enactment of Sec. 108(d)(7)(a).
32 TAM 200747018 (11/23/07).
33 See Regs. Sec. 1.1361-4.
34 Notice 99-6, 1991-1 C.B. 321.
35 Rev. Rul. 2008-18, 2008-13 I.R.B. 674.
36 Rev. Rul. 73-526, 1973-2 C.B. 404.
37 Rev. Rul. 64-250, 1964-2 C.B. 333.
38 Mortgage Forgiveness Debt Relief Act of 2007, P.L. 110-142.
39 Sec. 6699(b)(2).
40 Rev. Proc. 2008-18, 2008-10 I.R.B. 573.
41 See Sec. 1361(g).
42 CCA 200818005 (5/2/08).
43 Rev. Rul. 78-330, 1978-2 C.B. 147.
44 Rev. Rul. 68-602, 1968-2 C.B. 135.
45 IRS Letter Ruling 200809017 (2/29/08).
46 See Rev. Proc. 96-30, §2.05, 1996-1 C.B. 696.
47 IRS Letter Ruling 200826030 (6/27/08).