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Give yourself the AICPA advantage with our unique perspective on the latest tax changes including the recent Tax Acts. Look at the most recent tax laws and other practical developments affecting corporations and pass-through entities. Consider the real world practical applications designed by national tax experts Sid Kess and Bill Harden.
Objectives:
Prerequisite: Basic knowledge of corporate taxation
Accepted for EA credits
735213
Summary of Major Developments
Chapter 2 – S Corporations – Qualifications, Election, and Corporate Level Taxes
The Green Book proposes to permanently extend the current zero and 15% tax rates for these income types for those taxpayers with incomes of up to $250,000 (MFJ) and $200,000 (single taxpayers). A 20% rate would be imposed on long-term capital gains and qualified dividends at income levels over $250,000 less the standard deduction and two personal exemptions (MFJ) and income over $200,000 less the standard deduction and one personal exemption (single taxpayers). The amounts are to be indexed for inflation from 2009. The proposal also notes that the reduced rates on gains on assets held over five years will be repealed. The change is proposed to take effect on the date of enactment for tax years that begin after December 31, 2010.
The increase in the application of the Kiddie Tax from children under age 18 to those under 19 and to full-time students between the ages of 18 and 24 whose earned income accounts for less than one-half of their support is reflected in a discussion regarding gifts of S corporation stock to children [§1(g)].
For taxable years beginning after December 31, 2006, restricted bank director stock is no longer treated as outstanding stock of an S corporation for purposes of (a) determining whether the S corporation has more than one class of stock; (b) determining the number of S corporation shareholders; and (c) allocating items of S corporation income, gain, loss and credit among the S corporation shareholders [Act 8232 of the Small Business and Work Opportunity Tax Act of 2007].
For years beginning after December 31, 2006, if a parent S corporation sells the stock of its QSub and the sale terminates the QSub election (which is usually the case), the sale is treated as a sale of an undivided interest in the assets of the QSub (based on the percentage of stock sold) followed by a deemed transfer of the sold QSub’s assets and liabilities to a new corporation in a transaction that qualifies under §351 [Act §8234 of the Small Business and Work Opportunity Tax Act of 2007].
The IRS has issued final regulations that treat QSubs and other single-owner disregarded entities as separate entities for purposes of employment tax and excise tax reporting. The final regulations eliminate the disregarded entity status for federal employment tax purposes for wages paid on or after January 1, 2009. In addition, the final regulations eliminate the disregarded entity status for excise taxes where the liability is imposed or the action is first required or permitted in periods beginning on or after January 1, 2008 (Reg. §301.7701-2, T.D. 9356, 8/15/2007).
Revenue Ruling 2009-15, 2009-21 IRB, clarifies through two examples that when an unincorporated entity becomes a corporation for federal tax purposes it also becomes eligible to elect S corporation status effective its first tax year.
The IRS has provided an additional simplified procedure for making a late S corporation election in Rev. Proc. 2007-62, 2007-41 I.R.B. 786. This revenue procedure allows an entity to make a late S corporation election by filing Form 2553 with a Form 1120S for the first taxable year the entity intended to be an S corporation, provided certain requirements are met. In addition, this revenue procedure provides simplified procedures for an entity to make a combined late S corporation and corporate entity classification election by filing Form 2553 with Form 1120S within six months after the due date of the return (excluding extensions).
For years beginning after May 25, 2007, capital gain from the sale of stock or securities is no longer treated as passive investment income for purposes of computing the tax on excessive passive investment income under §1375 and the prohibition against an S corporation having excessive passive investment income for three consecutive years under 1362(d)(3) [§1362(d)(3)(C); Act §8231 of the Small Business and Work Opportunity Tax Act of 2007].
The Recovery Act of 2009 has modified §1374(d)(7), which defines the recognition period, to provide a special rule for 2009 and 2010. Under the special rule, for any tax year that begins in 2009 or 2010, the built-in gains tax is not imposed if the seventh tax year in the recognition period occurred before the year beginning in 2009 or 2010.1 Likewise, for property that was acquired from a C in a carryover basis transaction, the period is seven rather than ten years for these two years.
PLR 200925005 involves whether, based on the facts in the ruling, certain expenses, salaries to employee owners related to outstanding receivables, at the time of conversion from a C corporation to an S corporation will qualify as built-in losses for purposes of §1374. The Service found they do qualify if paid within the first two and one-half months of the conversion period.
1 This rule does not apply to certain distributions from thrifts under §593(e). These have an unlimited period under the old 10-year rule and continue to have an unlimited period under the seven-year rule.
Chapter 3 – S Corporations – Basis, Operations, and Distributions
The IRS has issued final regulations under Reg. §1.1367-2 to limit an S corporation shareholder’s open account indebtedness, net of repayments, to $25,000 at the close of any day during the S corporation’s taxable year [TD 9428, effective October 20, 2008].
Effective May 25, 2007, an S corporation may eliminate pre-1983 earnings and profits notwithstanding that it may not have been an S corporation for its first tax year beginning after December 31, 1996 [Act 8235 of the Small Business and Work Opportunity Tax Act of 2007].
Revenue Ruling 2008-42, addresses two issues involving (key person) employer-owned life insurance contracts. The first is whether premiums paid by an S corporation for this type of policy (when the S corporation is directly or indirectly a beneficiary) reduce the S corporation’s AAA. The second is whether the death benefits meeting an exception under §101(j)(2) increase AAA. The ruling concludes that premiums paid by the S corporation on an employer-owned life insurance contract (the S corporation is directly or indirectly a beneficiary) do not reduce the S corporation’s AAA. It also holds that the benefits received by reason of the death from this type of policy that meets an exception under §101(j)(2) do not increase the S corporation’s AAA.
For tax years beginning in 2006 and through 2009, an S corporation shareholder is required to reduce the basis in their S corporation stock by the shareholder’s pro rata share of the S corporation’s adjusted basis in any non-cash donations the S corporation makes to charity [Pension Protection Act of 2006 extended by the Emergency Economic Stabilization Act of 2008].
Revenue Procedure 2008-18, 2008-10 IRB 573, details how a bank (including a bank QSub) that changes from the reserve method bad debts under §585 for its first tax year with a §1362(a) S election can elect under §1361(g) to take the §481(a) adjustment into taxable income for the preceding tax year.
The IRS recently released special rules providing that a two-percent shareholderemployee of an S corporation may deduct amounts paid for insurance under §162(l) (the 100% deduction for self-employed health insurance premiums) if the insurance plan was established by the S corporation. A plan is considered established by the S corporation under these rules if either (1) the S corporation makes the premium payments in the current year or (2) the two-percent shareholder makes the premium payments and is then reimbursed by the S corporation in the current year. [Notice 2008-1, I.R.B. 2007-2 (12/13/2007)].
For years beginning after December 31, 2006, an ESBT may not deduct interest paid or accrued in connection with the acquisition of stock in an S corporation [Act 8236 of the Small Business and Work Opportunity Tax Act of 2007, amending IRC §642(c)(2)(C)].
The Worker, Retiree, and Employer Recovery Act of 2008 has increased the penalty created by the Mortgage Forgiveness Debt Relief Act of 2007 on S corporations that fail to meet any information filing obligation under IRC §6037. The penalty is increased from $85 to $89 per month (or portion thereof) times the number of persons who were shareholders in the S corporation at any time during the tax year for each month that the failure continues, up to a maximum of twelve months. The S corporation may have the penalty abated for reasonable cause. This increase applies to returns required to be filed after December 31, 2008. [IRC §§6699.]
The Mortgage Forgiveness Debt Relief Act of 2007 enacted a new provision to protect the taxpayer identity information of an S corporation shareholder. In particular, new IRC §6103(e)(10) now prohibits an S corporation from disclosing any supporting schedule, attachment or list that includes the taxpayer identity information of any person other than the person conducting the investigation.
Chapter 4 – Section 1244 Stock and Formation of a Corporation
TD 9434 provides final regulations describing the continuity of interest requirement in a reorganization in which creditors may be treated as proprietors of the corporation. These final rules became effective on December 12, 2008. Regulation §1.368-1(e)(6) states that generally a creditor's claim against a target corporation may be a proprietary interest in the target corporation if the target corporation is in a Title 11 or similar case2 or the amount of the target corporation’s liabilities exceeds the fair market value of its assets3 immediately prior to the potential reorganization.
Notice 2009-4, 2009-2 IRB, provides the guidance the Service is currently considering in determining the basis of stock acquired in a B reorganization [§368(a)(1)(B)].
2 Defined in §368(a)(3).
3 The corporation meets the definition of insolvency.
Chapter 5 – Personal Service Corporations and Limited Liability Companies
The Tax Court found that a Nevada firm that performed tax and bookkeeping services was a personal service corporation and subject to the flat 35% corporate rate despite the fact that it employed no CPAs. The court found that the taxpayer was attempting to define accounting services too narrowly and had failed to distinguish between public accounting services and the meaning of accounting services under §448(d)(2) (Rainbow Tax Services, Inc. v. Comm., 128 T.C. 5 (2007)).
In a Tax Court summary opinion, the Tax Court ruled that a corporation that performed architectural services may not take treasury stock into account in determining whether employees who perform personal services own substantially all (i.e., at least 95%) of the outstanding stock of the corporation, as required under §448(d)(2)(B) (Robertson Strong & Apgar Architects, PC v. Comm., TC Summary Opinion 2007-48).
Garnett, 132 TC No. 19, involves owners of numerous LLC and LLP interests in agricultural business operations. The interests were not found to automatically be the equivalent of limited partner interests under the passive loss rule limitations for limited partner interests, which allows for the broader array of tests. See also Thompson, 2009-2 USTC ¶50,501 (Ct. Cl.).
CCA 200924043 addresses whether a loss recognized in a §301 distribution by a subsidiary which was deferred under §267(f) and not taken into account under the rules of §1502, can be taken when the parent converts to an LLC. The Service finds that the when the sub is a first tier sub, it takes a loss when the parent liquidated under §331 as a result of the conversion.
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