Sole shareholder entitled to passthrough loss

Article Abstract:

The fifth circuit court has ruled in the 1997 'Bolding' case that the single shareholder/president of an S corporation sufficiently supported his claim for a passthrough loss deduction. The court found that the actual borrower of funds directly deposited in the account of his S corporation was the taxpayer himself instead of the corporation. The taxpayer signed the note, financing statement and security agreement as an individual and did not act as a corporate representative. A promissory note indicating an ambiguous d/b/a designation and his social security numbers also bolstered the taxpayer's claim that he was the borrower. Moreover, he proved that he forwarded the funds to the corporation, which treated the funds as a loan from the taxpayer. The court therefore held that the taxpayer had a right to enjoy a raise on a corresponding basis, which proved his entitlement to a passthrough loss deduction.

Taxation, Stockholders, Loss deductions

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S election increased tax on long-term contract

Article Abstract:

The Court of Appeals for the Eighth Circuit decided in the 'Broadaway' case that an S election froze the earnings-and-profits (E&P) account of the former C corporation. A greater portion of shareholder distributions were therefore taxable since the C corporation had undervalued expenses on a long-term construction contract that was not finished until after the effectivity date of the S election. The taxpayers, who were shareholders in a road construction firm that used to be a C corporation, calculated E&P using the percentage-of-completion approach as provided by Sec 312(n)(6) although it utilized the completed-contract accounting method to measure its taxable income. When the S corporations made distributions, the IRS asserted that the full C corporation E&P must be utilized to find out the portion of the distributions that were taxable dividends. The court sided with the IRS.

Corporate distributions

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