The relevant facts enumerated in the ILM are as follows: (1) An S corporation owned a qualified
subchapter S subsidiary (QSub); (2) the QSub was placed in receivership because of its precarious financial condition; (3) the S corporation and its shareholders wanted to pass through an ordinary deduction before the QSub was placed in receivership; and (4) the S corporation therefore terminated its S corporation status, which caused the QSub to become a C corporation immediately before the termination of its parent's
Subchapter S status.
Soon after subchapter K's codification, Congress introduced a second, simpler pass-through system--
subchapter S -into the federal income tax.
In a high percentage of cases the
Subchapter S corporation and the LLC is used in entrepreneurial business formation often for the reason of liability protection.
Conversely,
Subchapter S corporations generally do not pay tax on profits.
When selling their businesses, most owners of small C corporations will pay double the tax that they would have paid were they an LLC or
Subchapter S corporation.
A beneficiary of a qualified
subchapter S trust may deduct suspended losses under the at-risk rules and the passive loss rules when the trust disposes of the S corp stock.
Although the LLCs combination of limited liability and tax savings is in some ways similar to the benefits afforded by a
Subchapter S corporation or a limited partnership, the LLC is in many respects a very distinct and more flexible structure rather than the simple mixing of corporate benefits with partnership tax treatment.
Fox agreed the limitations imposed on being a
Subchapter S corporation are essentially removed.
338(h)(10) election results in P owning a new subsidiary with a stepped-up basis in its assets and A and B paying a single level of tax on the sale (because any S gain on the deemed asset sale should flow through and be taxed to the shareholders under the normal
subchapter S rules).
Tax preparers need to keep in mind that, although an S corporation generally is taxed according to
subchapter S of the Internal Revenue Code, it is taxed as a C corporation when an issue is not addressed in that subchapter.
Most notable among them was SB 516 (Speier), which would have denied
Subchapter S status to any California corporation grossing $20 million or more in revenue.
The company is organized as a
Subchapter S corporation, which limits its number of shareholders to 75, and taxes them in a manner similar to a partnership.
