Current developments in S corporations

Over the 12–month period ending March 2026 covered by this annual update article, recent legislation, a number of court cases, and items of IRS administration had a bearing on S corporations, with implications for their tax preparers and advisers. Members of the AICPA S Corporation Tax Technical Resource Panel, a volunteer group of practitioners devoted to study and advocacy concerning S corporations and their shareholders, provide this annual survey of these developments.

OBBBA provisions

On July 4, 2025, Congress passed the law known as the One Big Beautiful Bill Act (OBBBA), H.R. 1, P.L. 119–21. While the legislation did not directly address S corporations, it did make permanent the top individual income tax rate of 37% as well as the 20% qualified business income (QBI), or “pass–through,” deduction of Sec. 199A. As a result, an S corporation shareholder who benefits from the pass–through deduction will continue to pay an effective top tax rate of 29.6% on ordinary income from the S corporation.

Pass-through entity taxes

The OBBBA also temporarily increased the state and local tax deduction for individual itemized deductions from $10,000 to $40,000,¹ with a phaseout of the increase for filers with modified adjusted gross income (AGI) of $500,000 and above ($250,000 for married filing separately). More importantly, the OBBBA did not do away with the ability of pass–through entities to elect into or take advantage of the pass–through entity tax (PTET) regimes implemented by most states.²

While this is good news for pass–through entity business owners in terms of reducing federal income tax burdens, many of the questions related to PTET programs remain.³ Specific to S corporations and their owners, the concern remains that electing into or adopting a PTET may give rise to a second class of stock, which could terminate an S election.⁴ Nonresident owners may in some instances be required to pay the tax at the owner level, and if the S corporation distributes amounts to them to assist in paying it, this could be considered a disproportionate distribution. While the AICPA notified the IRS of this concern in a comment letter with recommendations in 2021,⁵ and it has been discussed in articles,⁶ no guidance has been issued. Accordingly, S corporations contemplating electing into or adopting a PTET regime must carefully weigh the pros and cons of such adoption, given the uncertainty that remains.

During the period covered by this article, courts decided issues in cases brought by S corporations or their shareholders that included allowable deductions and income exclusions and ownership of S corporation stock. In addition, this article explores choice–of–entity implications from recently decided and ongoing litigation involving the status, for purposes of self–employment tax, of limited partners in limited partnerships.

Sec. 199A and the Sec. 280E limitation

In Savage,⁷the Tax Court held that shareholders in two S corporations subject to Sec. 280E could not include wages paid to employees of those S corporations in the W–2 wages limitation amount⁸ used in calculating the Sec. 199A qualified business income (QBI) deduction.

Facts: Ayla A. Savage and Patricia A. Torres, shareholders in three S corporations, filed income tax returns for tax years 2018 and 2019 reporting items related to the S corporations. On those returns, Savage and Torres claimed QBI deductions under Sec. 199A for the income earned by the S corporations and passed through to them. To calculate the Sec. 199A deductions, Savage and Torres treated as W–2 wages the amounts paid and reported by the S corporations without regard to whether those amounts were deductible in determining taxable income.

Because the S corporations were marijuana businesses, they were subject to Sec. 280E, which disallows all deductions attributable to carrying on a trade or business consisting of trafficking in controlled substances (not including exclusions from gross income attributable to costs of goods sold). The IRS asserted that, in calculating the Sec. 199A deduction, Savage and Torres should have taken into account only wages that were deductible after the application of Sec. 280E; as a result, the IRS reduced their Sec. 199A deductions.

Holding: Under Sec. 199A, for tax years beginning after 2017, an individual taxpayer may deduct: (1) 20% of QBI from a partnership, S corporation, or sole proprietorship carried on by the taxpayer (a qualified trade or business) and (2) 20% of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.⁹ The deduction is not permitted with respect to certain specified service trades or businesses above certain income levels.¹⁰ The 20% deduction may not be used in computing AGI and may be utilized both by nonitemizers and itemizers.

For taxpayers with taxable income above certain levels, the deduction is limited to the greater of (1) 50% of the W–2 wages with respect to the qualified trade or business or (2) the sum of 25% of the W–2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.¹¹

Sec. 199A(b)(4)(A) defines W–2 wages as amounts paid under Sec. 6051(a) by a person for the employment of employees during the calendar year ending during the person’s tax year. Sec. 199A(b)(4)(B), however, limits W–2 wages to those wages that are “properly allocable” to QBI for purposes of Sec. 199A(c)(1).

In turn, Sec. 199A(c)(1) defines the term “qualified business income” as comprising, for any tax year, the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer.

Finally, Sec. 199A(c)(3)(A)(ii) provides that qualified items of income, gain, deduction, and loss include only those amounts “included or allowed in determining taxable income for the taxable year.”

Because the wages paid by the S corporations subject to Sec. 280E were nondeductible in computing taxable income, the Tax Court found those wages were not properly allocable to QBI under Sec. 199A, and therefore they were not W–2 wages as defined in Sec. 199A(b)(4).

Accordingly, the court held that in computing the proper deduction allowed by Sec. 199A, the IRS’s disallowance of the deductions attributable to the wages paid by the S corporations subject to Sec. 280E was consistent with the statutory text.¹²

Forgiveness of related-party debt does not equate to worthlessness

In Kelly,¹³ which involved two S corporations, the Ninth Circuit affirmed that worthlessness of bad debts is not presumed where cancellation–of–debt (COD) income results from a discharge of debt and that the taxpayer has the burden of proof regarding whether a discharged debt is worthless.

Facts: Between 2007 and 2010, Michael Kelly transferred millions of dollars between his business entities and characterized the transfers as loans. These included loans by Kelly Capital, one of Kelly’s single–member limited liability companies (SMLLCs), to First Commercial Corporation (FCC), an S corporation in which Kelly held a 75% ownership stake, and Greenback Entertainment Inc., an S corporation that Kelly wholly owned. On Dec. 31, 2010, Kelly canceled many of the purported loans, resulting in his reporting $145 million of pass–through COD income, which he excluded from his 2010 personal income tax return due to his personal insolvency.¹⁴ FCC and Greenback reported COD income of $21 million and $2 million, respectively, but also excluded the COD income due to their own claimed insolvency so that it would not flow to Kelly. At the individual level, Kelly reported a short–term capital loss of $87 million attributable to a nonbusiness bad–debt deduction, including $17.8 million owed by FCC and $2 million owed by Greenback to the SMLLC that the SMLLC did not collect because the debt was forgiven.

Kelly took the position that a canceled debt automatically becomes worthless, creating COD income and a worthless debt deduction simultaneously. The IRS did not agree and issued deficiency notices, which Kelly challenged in Tax Court. The court held, among other findings, that Kelly had not established that the two entities were insolvent. He also had not established that the debts owed to him were worthless in 2010, and thus they could not be deducted from his income for that year. In addition, the Tax Court found that the COD income could not be excluded from his personal income. The Tax Court’s determinations resulted in income tax deficiencies of approximately $5.3 million and $10,000 for 2010 and 2011, respectively. Kelly appealed to the Ninth Circuit the Tax Court’s determinations that the FCC and Greenback loans were not proven to be worthless at the time he purportedly canceled them.

Holding: To claim a nonbusiness bad–debt deduction under Sec. 166, a taxpayer must establish that (1) the debt is bona fide; (2) the taxpayer has an adjusted basis in the debt sufficient to claim the deduction; and (3) the debt became wholly worthless within the tax year. The Ninth Circuit, citing Cooper,¹⁵ found that mere belief of worthlessness is insufficient and the taxpayer has the burden of proof to show worthlessness by establishing sufficient objective facts. Under this framework, the Ninth Circuit held that the Tax Court properly construed Secs. 61, 108, and 166 to reject Kelly’s argument. Just because a debt is “forgiven” by a creditor does not mean the debt was necessarily “worthless,” as is required for a bad–debt deduction. Also, if even a “modest fraction” of a debt is recoverable, it is not worthless, the court stated.¹⁶

The Ninth Circuit explained that “worthless” and “discharge” are not mere synonyms and that determining lack of value requires examining the objective facts. Without objective evidence demonstrating worthlessness, any transfer of money could be categorized as a loan and later canceled to produce an illegitimate tax benefit. To avoid this result, the court noted, Congress enacted an objective test of actual worthlessness. The court cited Whipple¹⁷ and Redman¹⁸ (noting Congress abandoned the subjective–worthlessness test).

Additionally, the Ninth Circuit rejected Kelly’s argument that Secs. 61 and 108(a) (1)(B) have a relation to Sec. 166 and the worthlessness determination, instead comparing the Sec. 166 worthless–debt deduction to a casualty loss. The court stated that allowing a discharging creditor to claim a worthless–debt deduction would be “like allowing an insurance payout to someone who intentionally burned down [their] own house.”

Kelly conceded that the debts were not wholly worthless but maintained that they were “near[ly] wholly worthless.”

Furthermore, Kelly failed to show the debts were uncollectible. Thus, the Ninth Circuit found the Tax Court did not err by requiring Kelly to prove the worthlessness of his discharged debts and declined to presume worthlessness of the loans because COD income arose from that discharge.

Frustration of public policy

In Hampton,¹⁹ the Tax Court denied a loss deduction to an S corporation for forfeited assets related to the criminal activity of its sole shareholder.

Facts: An S corporation wholly owned by the taxpayer had its bank accounts seized by the U.S. Marshals Service in 2016 to satisfy a criminal forfeiture judgment tied to the taxpayer’s prior bribery, fraud, and money laundering convictions. The S corporation, Hampton Capital Management Inc. (HCM), claimed a loss deduction on its 2016 Form 1120–S, U.S. Income Tax Return for an S Corporation, for the seized funds, and the sole shareholder, Hampton, claimed the corresponding pass–through loss on his tax return for 2016. The IRS disallowed the deduction and increased Hampton’s income by $855,882.

The S corporation included a disclosure statement with the Form 1120–S, laying out the basic facts and noting the forfeiture loss was being claimed as a deduction under Sec. 165.

Hampton sought to distinguish his personal conduct’s consequences from those of his wholly owned S corporation, which the court likened to the taxpayer’s claim in Holmes Enterprises²⁰ of his business being an “innocent bystander.” The loss of HCM’s assets through forfeiture by an “over–zealous” government should not be held against the corporation, he contended, even though such a holding would allow him to take the pass–through loss.

Holding: The principal issue was whether Hampton could claim a pass–through loss for the seized amounts or whether the public–policy doctrine barred such a deduction where the forfeiture related to criminal conduct. The Tax Court applied the public–policy doctrine, quoting Nacchio:²¹ “We agree with the parties that §165 is subject to a ‘frustration of public policy’ doctrine.”

The “frustration of public policy” argument has long been used to deny deductions that would frustrate clearly defined governmental policies against criminal activity. This policy holds that a deduction for a criminal forfeiture would impermissibly reduce its punitive “sting.”

The court rejected Hampton’s argument that because HCM had not been charged, the loss deduction had not been disallowed at the S corporation level and therefore he should be allowed the deduction. The court noted that the taxpayer was the wrongdoer, he was the sole owner of HCM, and the seized funds represented proceeds of his crimes; therefore, allowing a pass–through deduction in these circumstances would still contravene public policy.

In support of its holding, the court cited a 2016 decision²² from the Sixth Circuit (the circuit to which an appeal in the case would lie) holding that a corporation wholly owned by a convicted criminal, the forfeited property of which had been used in a criminal scheme, was not a person “other than the defendant.” Similarly, HCM could not claim an interest in property subject to forfeiture, the Tax Court held.

The moral of the story is that taxpayers may not circumvent the nondeducibility of losses from criminal forfeitures or similar penalties by routing them through an S corporation or other pass–through entity.

Beneficial ownership of S corporation stock

In Berry,²³ the Tax Court determined that an individual was the beneficial owner of 50% of the stock of an S corporation and thus was required to include his allocable share of the S corporation’s income in his taxable income pursuant to Sec. 1366.

Facts: AndrewBerry and his father each owned 50% of Phoenix Construction & Remodeling Inc. (PCR), an S corporation. In March 2016, Berry was stripped of his status as a corporate officer of PCR. He argued that loss of status as an officer equated to loss of beneficial ownership and the resultant taxation on company profits for 2016.

Holding: The Tax Court disagreed, concluding that Berry remained a 50% shareholder throughout 2016 based on beneficial ownership; his removal as an officer did not equal the loss of his equity interest.

The issue of beneficial ownership versus legal ownership usually involves a falling out between the owners of a profitable company. Someone has to report the income, and the government often has to enter the fray to prevent being whipsawed.

Circuit courts have held that beneficial ownership must be taken into account as well as record ownership of stock.²⁴ The Tax Court cited these cases for what it deemed to be the relevant factors and concluded that there was no credible evidence of any transfer, restriction, or termination of Berry’s ownership during the year.

Objective indicia also supported continued ownership: PCR issued Berry a 2016 Schedule K–1 (1120–S), Shareholder’s Share of Income, Deductions, Credits, etc., reflecting a 50% interest. Berry and his spouse also claimed PCR pass–through losses on their 2016 Form 1040, U.S. Individual Income Tax Return, consistent with that Schedule K–1. A purported arrangement for Berry to sell his stock effective Jan. 1, 2017, did not alter the result, as there was no “strong proof” that beneficial ownership transferred before that date.

Accordingly, the court concluded that Berry remained a 50% shareholder of PCR throughout 2016 and that he and his spouse were required to include on their joint return his 50% pro rata share of PCR’s income under Sec. 1366(a)(1), regardless of whether cash was distributed.

Ownership of shares

In Veeraswamy,²⁵ the Second Circuit affirmed the Tax Court’s conclusion that the taxpayer, Karen Veeraswamy, could not disavow her half–ownership of an S corporation, Ashand Enterprises, because she believed her husband, Velappan Veeraswamy, had taken over her shares.

Facts: The couple’s marriage had been strained since 2004, and in 2011, Karen moved out of their home and filed for divorce. Then, in 2013, Velappan filed for Chapter 11 bankruptcy on Ashand’s behalf. During Ashand’s bankruptcy trial, Velappan claimed that he was the corporation’s sole owner. Believing she was not an owner, Karen did not claim any ownership during the bankruptcy but filed a claim as a creditor of the corporation to protect her interests with respect to an award for child support in the divorce. While not granting any amount for her support claim, the bankruptcy court ordered the surplus from the sale of the company’s assets to be put into escrow until the divorce proceedings were finished and stated that the decree “shall not be construed as to settle any issues as to the propriety of payments by the Debtor as between the Debtor’s equity holders or parties in interest.”

In 2018, Velappan filed for Chapter 13 bankruptcy due to the support award and federal tax debts. Karen again filed a motion as a creditor in this proceeding (which was then converted to a Chapter 7 case). During his bankruptcy, in 2019, Velappan died. Soon after, Karen found documentation that established her as a 50% owner of Ashand and requested her share of the surplus from the prior bankruptcy. Karen’s equity claim was approved in a final settlement in 2022 as part of the Velappan bankruptcy as well as an amount for domestic support per the divorce (neither of which Karen reported on her federal income tax return).

Meanwhile, the IRS had investigated Ashand and determined it had failed to report a $1.9 million capital gain in 2014 from the sale of its primary asset at the time, an apartment and commercial building in New York City, plus rental income for the same year. After not fully recovering its claim for taxes from Velappan’s estate and upon learning of Karen’s claim and settlement award, the IRS issued a deficiency notice against Karen for her share of the S corporation income based on her 50% ownership.

Holding: Both the Tax Court and the Second Circuit held that, notwithstanding Velappan’s assertion that he was the sole owner of the corporation and Karen’s earlier belief she was not an owner, Karen was and continued to be a 50% owner. At trial in Tax Court, Karen attempted to assert she had abandoned her interest in Ashand. That was thwarted by the fact that she later filed claims to recover the surplus associated with the sale of Ashand’s assets because of such ownership. The Second Circuit held that Karen did not demonstrate she had abandoned her interest prior to 2014 and affirmed the Tax Court’s finding that she was liable for taxes and penalties, as she was unable to demonstrate reasonable cause for failure to file.

Reconsidering entity choice in light of recent developments under Sec. 1402

A growing body of case law interpreting who qualifies as a “limited partner” for purposes of the self–employment tax exception under Sec. 1402(a)(13) may begin to influence entity choice decisions when comparing partnerships and S corporations.

Employment taxes and S corporation shareholder-employees

Under Sec. 162(a), a trade or business may deduct ordinary and necessary expenses, including a reasonable allowance for salaries or other compensation for personal services rendered. For employment tax purposes, Secs. 3121(a), 3306(b), and 3401(a) broadly define “wages” as all remuneration from employment. Sec. 3121(d)(1) further defines an employee to include an officer of a corporation, including an S corporation.

As a result, payments for services rendered by S corporation officers — whether or not they are shareholders — must be treated as wages subject to employment taxes. The requirement that, for an S corporation to claim a deduction for compensation paid to its shareholder–employees, the compensation must be “reasonable”²⁶ and is subject to payroll taxes — rather than characterizing all earnings as distributions — is a frequently cited factor favoring S corporation status over partnership taxation.

Self-employment tax and the limited partner exception

In contrast, Sec. 1402(a) defines “net earnings from self–employment” to include a partner’s distributive share of income or loss from any trade or business carried on by a partnership. However, Sec. 1402(a) provides an exception for limited partners, allowing them to exclude their distributive share of partnership income (other than guaranteed payments) from net earnings from self–employment and thus from self–employment tax. This exception has remained substantively unchanged since its enactment as part of the Social Security Amendments of 1977, P.L. 95–216.

For many years, both the Social Security Administration (SSA) and the IRS applied a definition of “limited partner” that focused primarily on limited liability of the partner under state law. The Social Security regulations provide that a limited partner is one whose financial liability is limited to the amount of the partner’s investment and who generally does not perform services or participate in the control of the partnership’s business during the tax year.²⁷

Similarly, until 2022, the IRS instructions to Form 1065, U.S. Return of Partnership Income, defined a limited partner as a partner in a partnership formed under state limited partnership law whose personal liability for partnership debts is limited to the amount of money or property contributed (or required to be contributed) to the partnership.

The rise of the functional-analysis test

The introduction of the functionality test by the IRS for purposes of interpreting whether a limited partner qualified for the self–employment exception began with Renkemeyer, Campbell & Weaver, LLP.²⁸ In the absence of a statutory or regulatory definition of “limited partner” for purposes of Sec. 1402(a)(13), the Tax Court applied what has come to be known as a “functional–analysis test.” Under this approach, courts look beyond formal titles or state–law classifications and examine the actual role, activities, and economic reality of the partner’s involvement in the partnership.

The Tax Court in Renkemeyer and subsequent cases emphasized that the legislative history of Sec. 1402(a)(13) indicated Congress intended the exclusion to apply only to passive investors, not partners who actively participate in the partnership’s trade or business. Subsequent cases applying this functional analysis include Castigliola,²⁹ Hardy,³⁰ Soroban Capital Partners LP,³¹ and Denham Capital Management, LP.³²

Under these authorities, even where a partner’s personal liability for partnership debts is limited, active participation in the partnership’s business has generally resulted in the partner’s distributive share being subject to self–employment tax.

Consistent with this evolving interpretation, beginning in 2022, the IRS revised the Form 1065 instructions to state that whether a partner qualifies as a limited partner for self–employment tax purposes depends on whether the partner meets the definition of a limited partner under Sec. 1402(a)(13), signaling increased reliance on judicial interpretations rather than state–law labels.

The Fifth Circuit’s rejection of functional analysis

Most recently, in Sirius Solutions, L.L.L.P.,³³ the Fifth Circuit rejected the IRS’s and Tax Court’s functional–analysis approach. The court held that the term “limited partner” in Sec. 1402(a)(13) should be interpreted based on its ordinary meaning at the time of enactment, focusing on limited liability under state law rather than the partner’s level of activity.

The Fifth Circuit found no textual basis in the statute for a “passive investor” or functional–participation test and noted that Congress could have imposed such a requirement had it intended to do so. In reaching its conclusion, the court relied on contemporaneous dictionary definitions, long–standing IRS guidance, and SSA regulations, all of which emphasized limited liability as the defining characteristic of a limited partner.

As a result, for taxpayers located within the Fifth Circuit, the functional–analysis test established in Renkemeyer and subsequent cases may no longer apply. Instead, the determination turns on whether the partner’s personal liability for partnership debts is limited under applicable state law.³⁴

Guaranteed payments vs. reasonable compensation

Under Sirius Solutions, partners in a limited partnership with limited liability would be subject to self–employment tax only on guaranteed payments made under Sec. 707(c). While guaranteed payments are sometimes analogized to reasonable compensation paid to S corporation shareholder–employees, the statutory frameworks differ materially.

Sec. 707(c) provides that payments to a partner for services or the use of capital, determined without regard to partnership income, are treated as made to a nonpartner solely for purposes of Secs. 61(a) and 162(a). Notably, Sec. 707(c) does not impose an explicit reasonableness requirement.

Although Sec. 162(a) allows a deduction at the partnership level for only reasonable compensation, Regs. Sec. 1.162–7 focuses on excessive payments. Payments exceeding what would ordinarily be paid for similar services may be recharacterized as nondeductible distributions.³⁵ Importantly, the reasonableness standard under Sec. 162 operates as a ceiling, not a floor. If a guaranteed payment is unreasonably high, the deduction may be limited; however, if a guaranteed payment is unreasonably low, the partnership is still entitled to deduct the amount paid. Nothing in Sec. 162 requires a partnership to pay a minimum reasonable amount in order to claim a deduction.

Implications for entity choice

Accordingly, when comparing partnership and S corporation structures, it becomes clear that S corporation shareholders remain subject to mandatory reasonable–compensation requirements, with wages fully subject to employment taxes. By contrast, assuming the continued viability of Sirius Solutions, a partner performing services at the partnership level would generally be compensated through a guaranteed payment, which is subject to self–employment tax but is not subject to a minimum reasonableness standard comparable to that imposed on S corporation wages.

Reducing guaranteed payments may lower self–employment tax exposure and, where applicable, allow a greater portion of partnership income to remain as ordinary business income eligible for the Sec. 199A deduction. By contrast, reasonable compensation paid to an S corporation shareholder–employee is subject to employment taxes and, where applicable, correspondingly reduces the amount of S corporation income eligible for the Sec. 199A deduction.

While entity choice involves numerous other considerations — including distribution mechanics, debt basis rules, and liquidation tax consequences — the divergent treatment of guaranteed payments and reasonable compensation represents a potentially significant development that may influence future structuring decisions.

Administrative items

Form 1120-S change: The 2025 Form 1120–S changed line 14 on Schedule K, Shareholders’ Pro Rata Share Items, from a single checkbox to a two–line query with yes/no questions to indicate whether a Schedule K–2, Shareholders’ Pro Rata Share Items — International, would nominally be required but for the corporation’s qualifying for an exception to filing Schedule K–2.

Audit campaigns: The IRS has removed all audit campaigns specific to S corporations from the Large Business & International Division’s list of active audit initiatives. This does not mean these issues cannot be raised, but this change should be some indication of priorities.

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Footnotes

¹Adjusted for inflation after 2025 and reverting to $10,000 after 2029.

²See also Lacey, “Cap Raised, Strings Attached: The 2025 SALT Shake-up,” 57-3 The Tax Adviser 74 (March 2026).

³For a review of considerations, see Sherr, “Questions to Consider Before Electing Into a PTE Tax,” 53-9 The Tax Adviser 26 (September 2022).

⁴Sec. 1361(b)(1)(D).

⁵“AICPA Comments — Deductibility of Partnerships and S Corps Payments,” Oct. 26, 2021.

⁶E.g., Mucenski-Keck and Ramos, “Federal Implications of Passthrough Entity Tax Elections,” 53-11 The Tax Adviser 38 (November 2022).

⁷Savage, 165 T.C. No. 5 (2025).

⁸Secs. 199A(b)(2)(B) and (b)(4).

⁹Secs. 199A(a) and (b).

¹⁰Sec. 199A(d).

¹¹Sec. 199A(b)(2)(B).

¹²However, note that, as of this writing, the Sec. 280E limitation applies to trafficking in controlled substances within the meaning of Schedules I and II of the Controlled Substances Act. In April 2026, a Justice Department press release announced the reclassification of certain marijuana products from Schedule I to Schedule III, along with a public hearing in an “expedited” process that would similarly reschedule marijuana more broadly.

¹³Kelly, 139 F.4th 854 (9th Cir. 2025), aff’g T.C. Memo. 2021-76.

¹⁴Sec. 108(a)(1)(B).

¹⁵Cooper, 877 F.3d 1086 (9th Cir. 2017).

¹⁶Id. at 1094.

¹⁷Whipple, 373 U.S. 193 (1963).

¹⁸Redman, 155 F.2d 319 (1st Cir. 1946).

¹⁹Hampton, T.C. Memo. 2025-32.

²⁰Holmes Enterprises, Inc., 69 T.C. 114, 117 (1977).

²¹Nacchio, 824 F.3d 1370, 1374 (Fed. Cir. 2016).

²²Parenteau, 647 F. App’x 593, 594–95 (6th Cir. 2016).

²³Berry, T.C. Memo. 2025-109.

²⁴Walker, 544 F.2d 419 (9th Cir. 1976); Hoffman, 47 T.C. 218, 233 (1966). See also Ragghianti, 71 T.C. 346, 349 (1978), aff’d, 652 F.2d 65 (9th Cir. 1981), and Pacific Coast Music Jobbers, Inc., 55 T.C. 866, 874 (1971), aff’d without published opinion, 457 F.2d 1165 (5th Cir. 1972).

²⁵Veeraswamy, No. 25-102-CV (2d Cir. 2/9/26), aff’g T.C. Memo. 2024-83.

²⁶Regs. Sec. 1.162-7(a).

²⁷See 20 C.F.R. §404.1080(b)(3).

²⁸Renkemeyer, Campbell & Weaver, LLP, 136 T.C. 137 (2011).

²⁹Castigliola, T.C. Memo. 2017-62.

³⁰Hardy, T.C. Memo. 2017-16.

³¹Soroban Capital Partners LP, 161 T.C. 310 (2023).

³²Denham Capital Management, LP, T.C. Memo. 2024-114.

³³Sirius Solutions, L.L.L.P., No. 24-60240 (5th Cir. 1/16/26).

³⁴However, note that the opinion in Sirius Solutions was a panel decision of the Fifth Circuit and that the government on April 1, 2026, petitioned the court for an en banc rehearing. Also, as of this writing, appeals of Soroban and Denham remained pending in the Second Circuit and First Circuit, respectively.

³⁵See Regs. Sec. 1.162-7(b)(1).

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Contributors

Tony Nitti, CPA, MST, is a partner in EY’s National Tax Department in Denver. Kevin Walsh, CPA, is shareholder, director, and board chair with Walsh, Kelliher & Sharp CPAs, APC, in Fairbanks, Alaska. Lynn Mucenski-Keck, CPA, MST, is a partner with Withum in Rochester, N.Y. Jacob Ordos, J.D., is national tax manager with EY in New York City. Nitti is chair, and Walsh and Mucenski-Keck are members, of the AICPA S Corporation Tax Technical Resource Panel. For more information about this article, contact thetaxadviser@aicpa.org.

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