Shareholder's return starts S corporation assessment period

Article Abstract:

The Supreme Court has ruled that the IRS has the right to adjust a taxpayer's return with respect to S corporation items even though the statute of limitations has closed the S corporation's tax year. According to the court's 'Bufferd' ruling, the IRS retains the right to adjust a return as long as the tax year of the taxpayer holding shares in the S corporation has not yet been closed. The 'Bufferd' ruling resolves the question of whether it is the shareholder's return or that of the S corporation that determines the operation of the statute of limitations for the years before 1983. The ruling will affect all shareholders of S corporations who have claimed pass-through items for years prior to 1983, as well as small S corporations that are not subject to unified audit procedures. Thus, shareholders of S corporations need to be careful about granting voluntary extensions for tax assessment since it may be used as a basis for making adjustments on their returns.

Tax assessment, United States. Supreme Court

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Quandary for S corp. COD income pass-throughs

Article Abstract:

The IRS holds the view that the cancellation of debt (COD) income excluded under Sec. 108 by an S corporation does not raise the stock basis of its shareholders. The agency earlier expressed this position in TAM 9423003 and reiterated it with the subsequent issuance of TAMs 9541001 and 9541006. However, a number of prominent tax commentators do not share this view with the IRS. They argue that an insolvent S corporation's COD income should be an independently reported item of tax-exempt income under Sec. 1366(a)(1) and thus raise the shareholder stock basis under Sec. 1367. This controversy is unlikely to be resolved until it is brought to court. Commentators have asked the IRS to request the Congress to revise the Code but the Service does not believe that any legislation action is required. Meanwhile, taxpayers and tax consultants should proceed with care when evaluating the consequences of their tax-reporting position.

Management, Extinguishment of debts, Debt cancellation, Bankruptcy

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New regs. on S corp. adjustments adopt separate basis rules

Article Abstract:

The IRS has recently issued Proposed Regulations covering the determination of an S corporation's indebtedness and its shareholder's stock basis. Previous to the issuance of these rules, S corporations employed C corporations' approach for determining indebtedness and stock basis. Under the new Proposed Regulations, the basis of the shareholder's share and debt investments and that of the S corporation's assets are totally unrelated. A detailed analysis of the new rules is provided.

Securities, Securities taxes

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