No replay in computing E&P to measure dividend

Article Abstract:

The Tax Court decided in the 'Cameron' case that the E&P of a corporation that is computed right before an S election took effect through the use of estimated costs to complete contracts could not be recalculated when more reliable information were found in later years. The case involved a corporation which underestimated the actual costs of completing current contracts immediately prior to an S election, the consequence of which is a return that indicates massive E&P attributable to the underestimate. The court found that this is not unfair to the shareholders because it was the byproduct of their S election. It also reasoned that estimates were a natural part of the process and that the shareholders would not have complained had the cost estimates been favorable to them. Under Reg. 1.451-1(a), reasonable income accruals are effective and adjustments are possible in later years without reopening the initial year.

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Tough standard for service cost allocations

Article Abstract:

The IRS has the power to question cost allocation methodologies under Sec 446(b) or Sec 482. Although the two provisions have been described as overlapping, certain differences also exist. For instance, Sec 446(b) applies to all taxpayers but Sec 482 is applicable only to related-taxpayer transactions. Also, the former is focused on the issue of timing in that it looks at when an item should be included as income or deduction, while the latter focuses on who should properly report an item of income or deduction. However, both concerns are sometimes examined in a related-taxpayer context. Finally, the two sections differ in the burden of proof, with Sec 482 carrying more burden for taxpayers than Sec 446(b). For related taxpayers, the solution may be to expand the safe harbor provided in Reg 1.482-2(b)(3) in situations involving domestic corporations only.

Methods, Laws, regulations and rules, United States. Internal Revenue Service, Cost accounting, Related party transactions

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Steps to ensure that nonliquidating S corp. distributions receive proper tax treatment

Article Abstract:

Although the taxation rules applicable to partnerships also apply in most cases to Subchapter S corporations, there remain differences. The areas of difference relate to tax treatment of: income previously taxed, accumulated adjustments, retained earnings, and the "Other adjustments" classification on Schedule L of Form 1120S (beginning and ending balance sheets of taxable entity). Tax rules governing distributions by Subchapter S corporations that are not in the process of liquidation are examined in detail, with examples provided for clarity. These rules are also explained in terms of Subchapter C and Subchapter K organizations and by comparison to various partnership forms.

Small business

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