1.1368-l (g) election is its availability in situations other than when a shareholder is getting out of the S corporation (i.e., terminating his or her interest).
Because these elections allocate only the total earnings of the tax year from the dates shares are owned, the future income/loss is being allocated to those shareholders, and only those shareholders, who still have ownership in the S corporation after the transfer date.
It is important for tax practitioners to see these elections not necessarily as a tax-saving technique; rather, they should be viewed as a means to bring certainty to the individual shareholders by closing the books on the transaction date and allowing the selling shareholders to be allocated income earned only while they held their interest in the S corporation. Like agreeing to the price to be paid on the purchase of the stock, making the election is one of the terms of a transaction that is best addressed at the time of the transaction.
This requirement already existed for individuals, closely held corporations, personal service corporations, partnerships and S corporations; it is now expanded to C corporations, under AJCA Section 883.
Congress was concerned about hurdles that prevented small and community banks from qualifying as S corporations. One of these obstacles prohibited an IRA from being an S shareholder.
* The AJCA makes numerous S corporation changes, including increasing the number of shareholders, allowing IRA shareholders of bank S corporations, and permitting the transfer of suspended losses incident to divorce and the use of PALs and at-risk amounts by a QSST beneficiary.
The second situation was the same as the first, except that X transferred--by either sale or tax-free reorganization other than an F reorganization--all of its assets, including the Sub1 stock, to M, another S corporation. In the third situation, X owned all of the membership interests in limited liability company LLC, an eligible entity that elected under Regs.
It concluded that U was thus treated as an S corporation immediately after the merger, and the reorganization did not terminate X's election to treat Sub1 as a QSub.
Tax practitioners should be alert to unexpected potential consequences of an S corporation's acquiring another corporation, electing to treat the target as a qualified subchapter S subsidiary (QSub), and later selling the QSub's stock.
An S corporation may acquire a C corporation in a taxable stock acquisition.
The letter ruling describes three shareholders who planned to restructure their ownership of an S corporation with the same series of transactions.
Since for federal tax purposes, the LLC is "disregarded," the shareholder is deemed to own all of its S corporation stock; therefore, it is the sole owner of the limited partnership.