Kevin Downhour

1
S Corporation

• .

• Kevin Downhour
• Connie Lau
• Suzan Situmorang

2
Special Rule for Losses

• S-Corporation
• Advantages/Disadvantages
• Section 1366 (d)
• Pass-thru Loss Denied
• Conclusion

3
S Corporation

• A special form of corporation treated as
  flow-through entities.

4
Advantages

• Corporation exempt from taxation
• Pass-thru losses
• Undistributed income taxed once
• Splitting income to family members
• Certain Amounts separated and retain character
• capital gains, tax-exempt income, deductions,
  losses and tax credits

5
Disadvantages

• Not separate entity
• Undistributed earnings are taxed
• Subject to special S Corp taxes
• Special allocation of items not permitted
• Loss limitations are smaller
• Restrictions shareholders calendar year

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Sec. 1366 Pass-thru of items to s/h
(d) Special rules for losses and deductions (1)
Shall not exceed the sum of (A) the adjusted
basis of the s/h stock (B) the s/h adjusted
basis of any indebtedness of the S Corp.
to the s/h (2) Indefinite carryover of
disallowed losses and deductions (3) Carryover
of disallowed losses and deductions to
post-termination transition period
7
Pass thru loss denied

• Tax Court Cases examples
• Arun and Asmita Bhatia v. Comm T.C. Memo.
  1996-429
• Wilson v. Commissioner, T.C. Memo. 1991-544
• Shebester v. Commissioner, T.C. Memo. 1987-246
• Burnstein v. Commissioner, T.C. Memo. 1984-74
• Shareholders adjusted basis could not be
  increased by assumption of a related
  corporations debt.

8
Pass thru loss denied

• T/P conducts his business through two entities,
  both of which had elected S status.
• T/P is the majority shareholder
• T/P purportedly assumed a debt of S1 to S2
• S1 reported a loss
• At the beginning of the year, T/P had a zero
  basis in S1 stock but contended that his basis
  should be increased by the S1 liability he
  assumed, thus, allowing T/P to claim S1 loss

9
Conclusion

• Past cases have established certain principles
  in respect of the application of the indebtedness
  limitation under section 1366(d)(1)(B).
• The requirement that there be an actual economic
  outlay by the taxpayer
• Clearly establish the bona fides of the
  transactions

10
Question?