1. Topics

S Corporation, Partnership & LLC Taxation

Partnership Returns: Late Filing Penalties Increase

Late 2007 legislation brought changes to Sec. 6698, which provides for penalties against a partnership for filing a late or incomplete return.

Understanding the Tax Consequences of Liquidation to an S Shareholder

The shareholder consequences of a complete liquidation of an S corporation are governed by Secs. 331 and 1001. The dividend rules that otherwise apply to corporate distributions are not applicable to distributions in complete liquidation.

Holding Period and Basis Considerations of Partnership Conversions

This article summarizes the tax consequences of entity changes involving the conversion to or from any entity treated as a partnership for federal income tax purposes (e.g., general partnerships, limited partnerships, LLCs with two or more members, and limited liability partnerships).

S Corporations’ Charitable Contributions of Appreciated Property and Shareholders’ Adjusted Basis in S Stock

PPA amended Sec. 1367(a)(2) to limit the reduction in a shareholder’s basis to the shareholder’s pro-rata share of the S corporation’s adjusted basis of the contributed property, not the FMV.

Current Developments in Partners and Partnerships

During the period of this update (November 1, 2006–October 31, 2007), Treasury and the IRS worked to provide guidance for taxpayers on numerous changes that had been made to subchapter K over the past few years.

Special Issues Related to Distributions of Partnership Interests by Estates and Trusts

The complex rules governing the tax treatment of distributions from estates and trusts are further complicated when a partnership interest is distributed.

Prop. Regs. Reflect S Corporation Changes Made by AJCA and GO Zone Act

Proposed regulations provide guidance on S corporation family shareholder rules, the definitions of “powers of appointment” and “potential current beneficiaries” (PCBs) with regard to electing small business trusts (ESBTs), and the allowance of suspended losses to the spouse (or former spouse) of an S corporation shareholder.

Simplified Method Relief for Late S and Entity Classification Elections

The IRS provided an additional simplified method for certain eligible entities to request relief for late S elections and for late entity classification elections that were intended to be effective as of the intended effective date of the S election.

Preventing a Dissident Shareholder from Transferring Stock to Cause a Loss of S Status

When a corporation first elects S status, all shareholders of the corporation must consent to the election (Sec. 1362(a)(2)). However, once S status is in place, new shareholders, whether acquiring stock by purchase or gift, need not consent to the election, nor are they given the opportunity to consent.A voluntary

Interest Deduction on Debt-Financed Distributions

Editor: Kevin F. Reilly, J.D., CPA Although the real estate market has cooled off in many areas, the value of commercial properties seems to have been less affected than that of residential properties. In fact, many commercial properties continue to be worth substantially more than their historic cost. Most commercial

Current Developments in S Corporations (Part II)

This article covers S corporation operational issues.

QSubs Recognized as Separate Entities for Employment and Excise Taxes

Editor: Kevin F. Reilly, J.D., CPA The IRS has issued final regulations that treat qualified subchapter S subsidiaries (QSubs) and other disregarded entities (DEs) as separate entities for federal employment tax and certain excise tax purposes (TD 9356). Although the regulations are effective as of August 16, 2007, the employment

Sec. 1446 Withholding

Editor: Joel E. Ackerman, CPA, MST Foreign investment in the United States continues to rise. The investment vehicle of choice, especially in the case of real estate, is generally a tax-transparent entity such as a limited partnership, limited liability company, or similar foreign transparent entity that is treated as a

Modifying the Order of Distribution Rules for an S Corporation with AE&P

Editor: Joel E. Ackerman, CPA, MST A distribution from an S corporation is generally treated as made from the corporation’s accumulated adjustments account (AAA) tax free to the extent of a shareholder’s basis. It is then treated as taken from any remaining balance of AAA and is taxed at capital

Current Developments in S Corporations (Part I)

Part I of this two-part article discusses S corporation eligibility, elections, and termination issues, including several changes related to the Small Business and Work Opportunity Tax Act of 2007.

S Stock Call Options as a Second Class of Stock

Editor: Joel E. Ackerman, CPA, MST An S corporation can have only one class of stock; if a second class of stock exists, a corporation’s S election will terminate. The second-class-of-stock requirements are governed by the regulations under Sec. 1361, which states that generally call options, warrants, or similar instruments

Redemptions in Conjunction with Partnership Mergers Can Create Unexpected Tax Consequences

Editor: Frank J. O’Connell, Jr., CPA, Esq. The IRS has provided a road map for partnership mergers or consolidations in Regs. Sec. 1.708-1(c). When two or more partnerships merge or consolidate into a single partnership, the resulting partnership is, for purposes of Sec. 708, considered a continuation of any partnership

Tracking Tax Basis in an S Corp. ESOP

Editor: Frank J. O’Connell, Jr., CPA, Esq. Employee stock ownership plans (ESOPs) currently cover 10 million employees in the U.S. participating in approximately 11,000 plans, according to the ESOP Association. With the number of plans expected to increase, the need for tax accounting and recordkeeping for ESOPs is becoming more

Open Account Debt for S Shareholders

Editor: Anthony S. Bakale, CPA, M.Tax. On April 12, 2007, the Service issued proposed amendments to Regs. Sec. 1.1367-2 and -3 (REG-144859-04), to address concerns about the treatment of S shareholders’ open account debt. Background Regs. Sec. 1.1367-2(a) states that open account debt is a shareholder advance that is not

New Law Contains Small Business Tax Provisions

On May 25, 2007, President Bush signed into law the Small Business and Work Opportunity Act of 2007 (SBWOA ’07) (P.L.110-28), which included several tax provisions. Return preparer penalties: The SBWOA ’07 expands the scope of return preparer penalties and alters the standards of conduct that must be met to
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