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Federal Taxation of S Corporations

Deborah H. Schenk

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Federal Taxation of S Corporations examines: which corporations can benefit from an S corporation election; how and when to file; the major corporate “events,” such as incorporation, distribution, redemption, reorganization and dissolution; treatment of interest payments made by and to S corporations; how estate planners can get maximum benefits from stock in an S corporation; and compensation problems likely to be encountered by employee-shareholders of an S corporation. The book features: a detailed analysis of the regulations on eligibility requirements; a discussion of the passive activity rules; and a valuable chapter on financially distressed S corporations. In addition, Federal Taxation of S Corporations covers all the latest administrative announcements, cases, and other developments.

Book #00594; looseleaf, one volume, 894 pages; published in 1985, updated as needed. ISBN: 978-1-58852-033-3


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  • Availability: Available
  • Brand: Law Journal Press
  • Product Type: Books
  • Edition: 0
  • Page Count: 894
  • ISBN: 978-1-58852-033-3
  • Pub#/SKU#: 00594
  • Volume(s): 1

Author Image
  • Deborah H. Schenk

Professor Schenk teaches taxation law at the New York University School of Law.


CHAPTER 1
A Brief History

§ 1.01 Introduction
§ 1.02 1954 Proposal
§ 1.03 1958 Act
§ 1.04 Problems with the 1958 Act
§ 1.05 Service and Court Response
§ 1.06 1959-1981 Amendments
§ 1.07 Subchapter S Revision Act of 1982
§ 1.08 Tax Reform Act of 1986 and Subsequent Legislation
§ 1.09 Small Business Protection Act of 1996 and Subsequent Legislation

CHAPTER 2
Choice of Entity

§ 2.01 Introduction
§ 2.02 Classification of an Entity
§ 2.03 Taxation of Business Entities
[1] Taxation of a Corporation and Its Shareholders
[2] Taxation of Partnership and Partners
[3] Taxation of S Corporations
[4] Taxation of LLCs
§ 2.04 Choosing Between a C Corporation and an S Corporation
[1] Double Taxation
[2] Losses
[3] Disadvantages of an S Corporation
§ 2.05 Choosing Between a Partnership (or LLC) and an S Corporation
[1] Lack of Limitations
[2] Special Allocations
[3] Entity Level Borrowing
[4] Conversion from Corporate Form to a Partnership

CHAPTER 3
Eligibility Requirements

§ 3.01 Introduction
§ 3.02 Limit on Number of Shareholders
[1] Maximum Number
[2] Jointly Held Stock
[3] Family Members
[4] Owner of the Stock
[5] Avoiding the Limit
§ 3.03 Permissible Types of Shareholders
[1] Individuals
[2] Estates
[3] Trusts
[4] Partnerships
[5] Corporations
[6] Tax-Exempt Entities
[7] ESOPs
[8] Limited Liability Company
§ 3.04 One Class of Stock Requirement
[1] Voting and Nonvoting Common Stock
[2] Section 83 Property
[3] Rights to Distributions and Liquidation Proceeds
[4] Equity-Flavored Instruments
[5] Hybrid Debt
[6] Eliminating a Class of Stock
§ 3.05 Ineligible Corporations
[1] Insurance Companies
[2] Financial Institutions
[3] DISCs
[4] Corporations with Possessions Tax Credit
[5] Foreign Corporations
§ 3.06 Corporate Subsidiaries
[1] Subchapter C Subsidiary
[2] Qualified Subchapter S Subsidiary
§ 3.07 Miscellaneous Provisions
[1] Permitted Tax Year
[2] No Recent Termination
[3] Limitations on Sources of Income

CHAPTER 4
Organizing the Corporation

§ 4.01 Introduction
§ 4.02 Equity
[1] Voting and Nonvoting Common Stock
[2] Voting Trusts
[3] Other Differences
§ 4.03 Debt
[1] Advantages
[2] Disadvantages
§ 4.04 Tax Effect to Corporation and Shareholders on Incorporation
[1] Requirements for Shareholder Nonrecognition
[2] Recognition of Shareholder Gain
[3] Shareholder Basis
[4] Investment Credit Recapture
[5] Tax Effects to the Corporation
[6] Situation Where Sale Is Preferred
§ 4.05 Section 1244 Election
[1] Eligibility
[2] Effect
§ 4.06 Choice of a Taxable Year
[1] General Rule
[2] Ownership Taxable Year
[3] Business Purpose Taxable Year
[4] Exception if Tax Deposit Is Made
§ 4.07 Choice of Accounting Method

CHAPTER 5
The Election

§ 5.01 Need for Election
§ 5.02 Who Must Consent
[1] Time Shareholders Determined
[2] Definition of Shareholder
§ 5.03 When to File
[1] Corporate Election
[2] Shareholder Consents
§ 5.04 How to File
[1] Corporate Election
[2] Shareholder Consents
[3] Method of Filing
[4] Request for Extension
[5] Election by QSST
[6] Election by ESBT
[7] QSub Election
[8] Family Election
§ 5.05 New Shareholders
[1] Deemed Consent
[2] Definition of New Shareholder
§ 5.06 Waiver of Invalid Elections
[1] Inadvertent Invalid Elections
[2] Late or No Election
[3] Effective Date
§ 5.07 Election Expenses

CHAPTER 6
Effects of Election on the Corporation

§ 6.01 Election as a Tax-Significant Event
[1] Taxes at the Corporate Level
[2] Investment Tax Credit Recapture
[3] Recapture of Foreign Losses
[4] Lack of Tax Effect
[5] Carryforwards and Carrybacks
[6] LIFO Recapture
[7] Banking Provisions
§ 6.02 Computation of Corporation’s Taxable Income
[1] Need to Calculate
[2] Computation
§ 6.03 Elections
[1] Corporate Elections
[2] Shareholder Elections
§ 6.04 Section 1374 Tax on Built-in Gain
[1] Purpose
[2] Scope
[3] Computation of the Tax
[4] Reduced Pass-Through
[5] Effect on Earnings and Profits
[6] Effective Date
[7] Estimated Tax Payments
[8] Transition Rule
§ 6.05 Tax on Capital Gain for Pre-1987 S Corporations
§ 6.06 Tax on Passive Investment Income
[1] Scope
[2] Computation of the Tax
[3] Coordination with Section 1374 Tax
[4] Effect on Shareholders
[5] Waiver of Tax

CHAPTER 7
Effects of Election on the Shareholders

§ 7.01 Introduction
§ 7.02 Pass-Through System
[1] Separately Stated Items
[2] Nonseparately Stated Items
[3] Characterization
§ 7.03 Allocation of Income and Loss
[1] General Rule
[2] Elections to Close the Books
[3] Allocations in the Year of Termination
[4] Reallocations by the Service
§ 7.04 Timing of Pass-Through
[1] Years When Election Is in Effect
[2] Year of Termination
§ 7.05 Limits on Losses
[1] In General
[2] Coordination with Worthless Stock Deduction
[3] Coordination with Bad Debt Deduction
[4] Coordination with At-Risk Limitation
§ 7.06 Basis in Stock and Debt
[1] Original Basis in Stock
[2] Adjustments to Stock Basis Not Attributable to Subchapter S
[3] Original Basis in Debt
[4] Adjustments to Debt Basis Not Attributable to Subchapter S
[5] Increases to Basis of Stock in S Corporation
[6] Decreases in Basis of Stock in S Corporation
[7] Decrease in Basis of S Corporation Debt
[8] Increase in Basis of S Corporation Indebtedness
[9] Ordering Rules for Basis Adjustments
[10] Ways to Increase Basis
§ 7.07 Carryover of Unused Losses
[1] Carryover to S Year
[2] Carryover to Post-Termination Transition Period
§ 7.08 Identity of Reporting Shareholder
[1] Individuals
[2] Estates
[3] Trusts
[4] Section 83 Stock
[5] Tax-Exempt Shareholders
§ 7.09 Passive Activity Limitations
[1] In General
[2] Definition of Activity
[3] Definition of Passive Activity
[4] Income and Loss from Passive Activity
[5] Limitation on Losses
[6] Carryforward of PAL
[7] Former Passive Activity
[8] Relationship to Basis Limitation
[9] Passive Income Generators (PIGs)
[10] Conversion by a Closely Held C Corporation
§ 7.10 Treatment of Interest
[1] Debt Incurred by the Corporation
[2] Debt Incurred by Shareholder
[3] Below Market Loans
§ 7.11 Self-Charged Interest
[1] General Purpose
[2] Shareholder Loan to Corporation
[3] Corporate Loan to Shareholder
[4] Loans Between Related Corporations
[5] Election Out

CHAPTER 8
Distributions

§ 8.01 Introduction
§ 8.02 The Accumulated Adjustments Account
[1] Purpose of Account
[2] Computation
[3] Effect of Transfer of Shares
[4] Allocation of the AAA
[5] Timing of Adjustments
§ 8.03 Tax Treatment of Distributions to Shareholders
[1] Distributions Where E&P Are Absent
[2] Distributions Where E&P Are Present
§ 8.04 Noncash Distributions
[1] Corporate Level Effects
[2] Shareholder Level Effects
[3] Stock Dividends
§ 8.05 Effect of Distributions on the AAA
[1] Dividend Distributions
[2] Redemption Distributions
[3] Reorganizations
[4] Section 355 Transfers
[5] Adjustments When Books Are Closed
§ 8.06 Effect of Distributions on Earnings and Profits
[1] Subchapter S Distributions
[2] Stock Dividends
[3] Subchapter C Distributions
[4] ITC Recapture
§ 8.07 Post-Termination Distributions
[1] Distributions
[2] Election to Accelerate Dividends During One-Year Transition Period
§ 8.08 Shareholder Agreement Requiring Distribution

CHAPTER 9
Termination and Revocation

§ 9.01 Introduction
§ 9.02 Events Causing Termination
[1] Ceasing to Be a Small Business Corporation
[2] Failure to Use Permitted Tax Year
[3] Excess Passive Investment Income
[4] Effective Date
§ 9.03 Inadvertent Termination
[1] Termination
[2] Inadvertence
[3] Reacquired Eligibility
[4] Adjustments
[5] Status of Corporation
[6] Consents
§ 9.04 Intentional Termination
§ 9.05 Revocation
[1] Who Must Consent
[2] Effective Date
[3] Method of Revocation
[4] New Shareholders
[5] Successive Income Beneficiary of QSST
[6] Rescission of Revocation
§ 9.06 Effects of Termination
[1] Two Short Years
[2] Accounting for Income
[3] Miscellaneous Effects
§ 9.07 Post-Termination Transition Periods
[1] Determination of the Periods
[2] Distributions During Post-Termination Transition Periods
[3] Loss Carryovers During Post-Termination Transition Periods
§ 9.08 Reelection
[1] Five-Year Rule
[2] Exception

CHAPTER 10
Compensation

§ 10.01 Introduction
§ 10.02 Effect on Corporate Income
[1] Allowance of Deduction
[2] Timing of Deduction
§ 10.03 Cash Distributions v. Cash Salary
[1] S Corporations That Were Never C Corporations
[2] S Corporation with Earnings and Profits
[3] Other Differences
§ 10.04 Property Distributions v. Property as Salary
[1] Section 83 Property
§ 10.05 Fringe Benefits
§ 10.06 Reallocation of Income
[1] Reasonable Compensation for Services
[2] Use of Capital
[3] Adjustments
[4] Excessive Income
[5] Timing of Compensation
§ 10.07 Qualified Deferred Compensation Plans
[1] Comparison with Other Entities
[2] Remaining Disparities
§ 10.08 Equity Incentives
[1] Advantages
[2] Types of Equity Incentives

CHAPTER 11
Redemptions and Sales

§ 11.01 Introduction
§ 11.02 Redemptions Treated as Exchanges
[1] Qualification
[2] Effect on Redeeming Shareholder
[3] Effect on the Corporation
§ 11.03 Redemptions Treated as Distributions
[1] Scope
[2] Effect on Redeeming Shareholder
[3] Effect on Corporation
[4] Distributions During Post-Termination Transition Periods
§ 11.04 Retirement of Corporate Debt
[1] Recognition of Corporate Income
[2] Recognition of Income by Creditor
§ 11.05 Sales of S Corporation Stock
[1] Treatment of Selling Shareholder
[2] Purchasing Shareholder
[3] Termination of the Election

CHAPTER 12
Liquidations

§ 12.01 Relation to Subchapter C
§ 12.02 Section 331 Liquidation
[1] Treatment of Shareholders
[2] Treatment of Liquidating Corporation
§ 12.03 Liquidation of a Subsidiary
[1] Section 332 Liquidation
[2] Section 338 Liquidation
§ 12.04 Partial Liquidations
[1] Definition
[2] Taxation of Corporation
[3] Taxation of Shareholders

CHAPTER 13
Reorganizations

§ 13.01 Introduction
§ 13.02 General Requirements
[1] Continuity of Interest
[2] Continuity of Business Enterprise
[3] Business Purpose
[4] Plan of Reorganization
§ 13.03 Types of Reorganizations
[1] Type A Reorganization
[2] Forward Triangular Merger
[3] Reverse Triangular Merger
[4] Type B Reorganization
[5] Type C Reorganization
[6] Nondivisive Type D Reorganization
[7] Divisive Type D
[8] Type E Reorganization
[9] Type F Reorganization
[10] Type G Reorganization
§ 13.04 Tax Effects to Shareholders upon Reorganization
[1] Gain or Loss
[2] Basis of Acquired Property
[3] Pass-Through of Income and Loss in Year of Reorganization
[4] Unused Losses
[5] Previously Taxed Income
§ 13.05 Tax Treatment of the S Corporation
[1] Gain or Loss on the Reorganization
[2] Basis in Acquired Property
[3] Carryover of Unused Investment Tax Credits
[4] Carryover of Net Operating Losses
[5] Carryover of the Accumulated Earnings and Profits
[6] Carryover of the Accumulated Adjustments Account
[7] Carryover Built-in Gain Taint
§ 13.06 Taxable Mergers

CHAPTER 14
Estate Planning and S Corporations

§ 14.01 Introduction
§ 14.02 Inter Vivos Gifts
[1] Situations Where a Gift Is Appropriate
[2] Situations Where a Gift Is Inappropriate
§ 14.03 Trusts
[1] Eligible Trusts
[2] Special Problems for Trusts Holding S Corporation Stock
§ 14.04 Transfers for the Benefit of a Minor
[1] General Advantages
[2] Outright Gift
[3] Deemed Owner Trust
[4] Qualified Subchapter S Trust
[5] Special Problems
§ 14.05 Estates
[1] Estate as Shareholder
[2] Need to Distribute Stock to Eligible Shareholder
[3] Powers Needed by Executor
[4] Estate Tax Exclusion for Family Owned Business
§ 14.06 Post-Mortem Election
[1] Situations Where Election Is Appropriate
[2] Planning a Post-Mortem Election

CHAPTER 15
Buy-Sell and Shareholders’ Agreements

§ 15.01 General Purpose
§ 15.02 Buy-Sell Agreements
[1] Types of Agreements
[2] Reasons to Use
[3] Triggering Events
[4] Setting the Purchase Price
[5] Fixing Value for Estate Tax
[6] Notice
[7] Funding the Purchase
[8] Tax Consequences
§ 15.03 Shareholder Agreements
[1] Filing a Subchapter S Election
[2] Preserving the Election
[3] Revocation
[4] Election on Termination
[5] Election on Termination of Shareholder’s Entire Interest
[6] Election on Disposition of 20 Percent of the Stock
[7] Family Members Election
§ 15.04 Corporate/Shareholder Agreements
[1] Inadvertent Invalid Election or Termination
[2] Issuance of a Second Class of Stock
[3] Prohibition on Certain Businesses
[4] Distributions
§ 15.05 Enforcement
§ 15.06 One Class of Stock Requirement

CHAPTER 16
Financially Distressed S Corporations

§ 16.01 Introduction
§ 16.02 Dispositions of Property
[1] Transfers of Built-in Gain Property
§ 16.03 Transfer of Encumbered Property: Discharge of Indebtedness
[1] Creation of Income
[2] Taxable COD Income
[3] Tax-Exempt COD Income
[4] Distribution of Encumbered Property
§ 16.04 Transactions Involving Debt
[1] Modification of Debt Obligations
[2] Debt Acquired by Related Party
[3] Stock for Debt Exchange
[4] Excluded COD Income
[5] Treatment of Creditor-Shareholder
§ 16.05 Bankruptcy Issues
[1] Eligibility
[2] Corporate Income
[3] Suspended Losses
[4] Tax Liability of Reorganization Plan
[5] Termination
§ 16.06 Insolvency Reorganizations
[1] Acquisitive Type G Reorganization
[2] Divisive Type G Reorganization
[3] Failed Type G Reorganization
Index