Corporations And Other Business Entities

June 14, 2024

807 / How is an S corporation’s deduction for qualified business income determined?

<div class="Section1">Entities that are taxed under the rules governing pass-through taxation are generally entitled to a 20 percent deduction for qualified business income (QBI, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>). This deduction is equal to the sum of: (a)  the lesser of the combined qualified business income amount for the tax year or an amount equal to 20 percent of the excess of the taxpayer’s taxable income over any net capital gain and cooperative dividends, plus (b)  the lesser of 20 percent of qualified cooperative dividends or taxable income (reduced by net capital gain).<a href="#_ftn1" name="_ftnref1">1</a> The sum discussed above may not exceed the taxpayer’s taxable income for the tax year (reduced by net capital gain). Further, the 20 percent deduction with respect to qualified cooperative dividends is limited to taxable income (reduced by net capital gain). The deductible amount for each qualified trade or business is the lesser of: (a)  20 percent of the qualified business income with respect to the trade or business or (b)  the greater of (x) 50 percent of W-2 wage income or (y) the sum of 25 percent of the W-2 wages of the business plus 2.5 percent of the unadjusted basis, immediately after acquisition, of all qualified property (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>).<a href="#_ftn2" name="_ftnref2">2</a> <hr> Planning Point: The regulations provide guidance on how UBIA should be calculated in the case of a like-kind exchange or involuntary conversion. The regulations follow the Section 168 regulations in providing that property acquired in a like-kind exchange, or by conversion, is treated as MACRS property, so that the depreciation period is determined using the date the relinquished property was first placed into service unless an exception applies. The exception applies if the taxpayer elected not to apply Treasury Regulation § 1.168(i)-6. As a result, most property acquired in a like-kind exchange or involuntary conversion under the new rules will have two relevant placed in service dates. For calculating UBIA, the relevant date is the date the taxpayer places the property into service. For calculating its depreciable period, the relevant date is the date the taxpayer placed the original, relinquished property into service. <hr> Concurrently with the regulations, the IRS released Notice 2018-64, which contains a proposed revenue procedure with guidance for calculating W-2 wages for purposes of the Section 199A deduction for qualified business income. This guidance was finalized in Revenue Procedure 2019-11. The guidance provides three methods for calculating W-2 wages, including the “unmodified box method”, the “modified Box 1 method”, and the “tracking wages method”. The guidance further specifies that wages calculated under these methods are only taken into account in determining the W-2 wage limitations if properly allocable to QBI under Proposed Treasury Regulation § 1.199A-2(g). The unmodified box method involves taking the lesser of (1) the total of Box 1 entries for all W-2 forms or (2) the total of Box 5 entries for all W-2 forms (in either case, those that were filed with the SSA by the taxpayer for the year). Under the modified Box 1 method, the taxpayer subtracts from its total Box 1 entries amounts that are not wages for federal income tax withholding purposes, and then adds back the total of Box 12 entries for certain employees. The tracking wages method requires the taxpayer to actually track employees’ wages, and (1) total the wages subject to income tax withholding and (2) subtract the total of all Box 12 entries of certain employees. Revenue Procedure 2019-11 clarifies that, in the case of short taxable years, the business owner is required to use the “tracking wages method” with certain modifications. The total amount of wages subject to income tax withholding and reported on Form W-2 can only include amounts that are actually or constructively paid to the employee during the short tax year and reported on a Form W-2 for the calendar year with or within that short tax year. With respect to the amounts reported in Box 12, only the portion of the total amount reported that was actually deferred or contributed during the short year can be included in W-2 wages. If the taxable income is below the applicable threshold levels (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>), the deduction is simply 20 percent.<a href="#_ftn3" name="_ftnref3">3</a> If the taxable income exceeds the relevant threshold amount, but not by more than $50,000 ($100,000 for joint returns), and the amount determined under (b), above, is less than the amount under (a), above, then the deductible amount is determined without regard to the calculation required under (b). However, the deductible amount allowed under (a) is reduced by the amount that bears the same ratio to the “excess amount” as (1) the amount by which taxable income exceeds the threshold amount bears to (2) $50,000 ($100,000 for joint returns). The “excess amount” means the excess of amount determined under (a), above, over the amount determined under (b), above, without regard to the reduction described immediately above. “Combined QBI” for the year is the sum of the deductible amounts for each qualified trade or business of the taxpayer and 20 percent of the taxpayer’s qualified REIT dividends and qualified publicly traded partnership income.<a href="#_ftn4" name="_ftnref4">4</a> Qualified REIT dividends do not include any portion of a dividend received from a REIT that is a capital gain dividend or a qualified dividend.<a href="#_ftn5" name="_ftnref5">5</a> “Qualified cooperative dividends” includes a patronage dividend, per-unit retain allocation, qualified written notice of allocation, or any similar amount that is included in gross income and received from (a) a tax-exempt benevolent life insurance association, a mutual ditch or irrigation company, cooperative telephone company, like cooperative organization or a taxable or tax-exempt cooperative that is described in section 1381(a), or (2) a taxable cooperative governed by tax rules applicable to cooperatives before the enactment of subchapter T of the Code in 1962.<a href="#_ftn6" name="_ftnref6">6</a> “Qualified publicly traded partnership income” means the sum of: (1)  the net amount of the taxpayer’s allocable share of each qualified item of income, gain, deduction, and loss from a publicly-traded partnership that does not elect to be taxed as a corporation (so long as the item is connected with a U.S. trade or business and is included or allowed in determining taxable income for the year and is not excepted investment-type income, also not including the taxpayer’s reasonable compensation, guaranteed payments for services or Section 707(a) payments for services), and (2)  gain recognized by the taxpayer on disposing its interest in the partnership that is treated as ordinary income.<a href="#_ftn7" name="_ftnref7">7</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8581">8581</a> - Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8601">8601</a> for a more detailed discussion of the Section 199A regulations. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 199A(a) <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 199A(b)(2). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 199A(b)(3). <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 199A(b)(1). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 199A(e)(3). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 199A(e)(4). <a href="#_ftnref7" name="_ftn7">7</a>.  IRC § 199A(e)(5). </div></div>

March 13, 2024

803 / What is the personal holding company tax?

<div class="Section1">The personal holding company (PHC) tax is a penalty tax designed to keep shareholders from avoiding personal income taxes on securities and other income-producing property placed in a corporation to avoid higher personal income tax rates. The PHC tax is 20 percent (15 percent for tax years beginning prior to 2013) of the corporation’s undistributed PHC income (taxable income adjusted to reflect its net economic income for the year, minus dividends distributed to shareholders), if it meets both the “stock ownership” and “PHC income” tests.<a href="#_ftn1" name="_ftnref1">1</a></div> <div class="Section1"> A corporation meets the “stock ownership” test if more than 50 percent of the value of its stock is owned, directly or indirectly, by or for not more than 5 shareholders.<a href="#_ftn2" name="_ftnref2">2</a> Certain stock owned by families, trusts, estates, partners, partnerships, and corporations may be attributed to individuals for purposes of this rule.<a href="#_ftn3" name="_ftnref3">3</a> A corporation meets the “PHC income” requirement if 60 percent or more of its adjusted ordinary gross income is PHC income, generally defined to include the following: (1) dividends, interest, royalties, and annuities; (2) rents; (3) mineral, oil, and gas royalties; (4) copyright royalties; (5) produced film rents (amounts derived from film properties acquired before substantial completion of the production); (6) compensation from use of corporate property by shareholders; (7) personal service contracts; and (8) income from estates and trusts.<a href="#_ftn4" name="_ftnref4">4</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC §§ 541, as amended by ATRA, 542, 545. <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 542(a)(2). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 544. <a href="#_ftnref4" name="_ftn4">4</a>. IRC §§ 542(a)(1), 543(a). </div>

March 13, 2024

799 / How is a corporation taxed on capital gains?

<div class="Section1">Capital gains and losses are netted in the same manner as for an individual and net short-term capital gain, to the extent it exceeds net long-term capital loss, if any, is taxed at the corporation’s regular tax rates. Prior to 2018, a corporation reporting a “net capital gain” (i.e., where net long-term capital gain exceeds net short-term capital loss) was taxed under one of two following methods, depending on which produces the lower tax (the “alternative method” was repealed by the 2017 Tax Act):</div> <div class="Section1"> <ol> <li>Regular method. Net capital gain is included in gross income and taxed at the corporation’s regular tax rates; or</li> <li>Alternative method (prior to repeal). First, a tax on the corporation’s taxable income, exclusive of “net capital gain,” was calculated at the corporation’s regular tax rates. Then a second tax on the “net capital gain” (or, if less, taxable income) for the year is calculated at the rate of 35 percent. The tax on income exclusive of net capital gain and the tax on net capital gain are added to arrive at the corporation’s total tax. For certain gains from timber, the maximum rate is 15 percent.<a href="#_ftn1" name="_ftnref1">1</a></li> </ol> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC §§ 1201, prior to repeal by Pub. Law No. 115-97 (the 2017 Tax Act), 1222. </div>

March 13, 2024

805 / What is an S corporation? How is an S corporation taxed?

<div class="Section1">Editor’s Note: See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of the changes to pass-through taxation that were implemented under the 2017 tax reform legislation.<div class="Section1"> An S corporation is one that elects to be treated, in general, as a pass-through entity, thus avoiding most tax at the corporate level.<a href="#_ftn1" name="_ftnref1">1</a> To be eligible to make the election, a corporation must meet certain requirements as to the kind and number of shareholders, classes of stock, and sources of income. An S corporation must be a domestic corporation with only a single class of stock and may have up to 100 shareholders (none of whom are nonresident aliens) who are individuals, estates, and certain trusts. An S corporation may not be an ineligible corporation. An ineligible corporation is one of the following: (1) a financial institution that uses the reserve method of accounting for bad debts; (2) an insurance company; (3) a corporation electing (under IRC Section 936) credits for certain tax attributable to income from Puerto Rico and other U.S. possessions; or (4) a current or former domestic international sales corporation (DISC). Qualified plans and certain charitable organizations may be S corporation shareholders.<a href="#_ftn2" name="_ftnref2">2</a> Members of a family are treated as one shareholder. “Members of the family” are defined as “the common ancestor, lineal descendants of the common ancestor, and the spouses (or former spouses) of such lineal descendants or common ancestor.” Generally, the common ancestor may not be more than six generations removed from the youngest generation of shareholders who would be considered members of the family.<a href="#_ftn3" name="_ftnref3">3</a> Trusts that may be S corporation shareholders include the following: (1) a trust all of which is treated as owned by an individual who is a citizen or resident of the United States under the grantor trust rules (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="797">797</a>); (2) a trust that was described in (1) above immediately prior to the deemed owner’s death and continues in existence after such death may continue to be an S corporation shareholder for up to two years after the owner’s death; (3) a trust to which stock is transferred pursuant to a will may be an S corporation shareholder for up to two years after the date of the stock transfer; (4) a trust created primarily to exercise the voting power of stock transferred to it; (5) a qualified subchapter S trust (QSST); (6) an electing small business trust (ESBT); and (7) in the case of an S corporation that is a bank, an IRA or Roth IRA.<a href="#_ftn4" name="_ftnref4">4</a> A QSST is a trust that has only one current income beneficiary (who must be a citizen or resident of the U.S.), all income must be distributed currently, and corpus may not be distributed to anyone else during the life of such beneficiary. The income interest must terminate upon the earlier of the beneficiary’s death or termination of the trust, and if the trust terminates during the lifetime of the income beneficiary, all trust assets must be distributed to that beneficiary. The beneficiary must make an election for the trust to be treated as a QSST.<a href="#_ftn5" name="_ftnref5">5</a> An ESBT is a trust in which all of the beneficiaries are individuals, estates, or charitable organizations.<a href="#_ftn6" name="_ftnref6">6</a> Each potential current beneficiary of an ESBT is treated as a shareholder for purposes of the shareholder limitation.<a href="#_ftn7" name="_ftnref7">7</a> A potential current beneficiary is generally, with respect to any period, someone who is entitled to, or in the discretion of any person may receive, a distribution of principal or interest of the trust. In addition, a person treated as an owner of a trust under the grantor trust rules (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="797">797</a>) is a potential current beneficiary.<a href="#_ftn8" name="_ftnref8">8</a> If for any period there is no potential current beneficiary of an ESBT, the ESBT itself is treated as an S corporation shareholder.<a href="#_ftn9" name="_ftnref9">9</a> Trusts exempt from income tax, QSSTs, charitable remainder annuity trusts, and charitable remainder unitrusts may not be ESBTs. An interest in an ESBT may not be obtained by purchase.<a href="#_ftn10" name="_ftnref10">10</a> If any portion of a beneficiary’s basis in the beneficiary’s interest is determined under the cost basis rules, the interest was acquired by purchase.<a href="#_ftn11" name="_ftnref11">11</a> An ESBT is taxed at the highest income tax rate under IRC Section 1(e) (currently, 37 percent).<a href="#_ftn12" name="_ftnref12">12</a> The 2017 Tax Act expands the definition of a qualifying beneficiary under an electing small business trust (ESBT) to include nonresident aliens.<a href="#_ftn13" name="_ftnref13">13</a> This provision is effective beginning January 1, 2018. A corporation will be treated as having one class of stock if all of its outstanding shares confer identical rights to distribution and liquidation proceeds.<a href="#_ftn14" name="_ftnref14">14</a> However, “bona fide agreements to redeem or purchase stock at the time of death, disability or termination of employment” will be disregarded for purposes of the one-class rule unless a principal purpose of the arrangement is to circumvent the one-class rule. Similarly, bona fide buy-sell agreements will be disregarded unless a principal purpose of the arrangement is to circumvent the one-class rule and they establish a purchase price that is not substantially above or below the fair market value of the stock. Agreements that provide for a purchase price or redemption of stock at book value or a price between book value and fair market value will not be considered to establish a price that is substantially above or below fair market value.<a href="#_ftn15" name="_ftnref15">15</a> Regulations provide that agreements triggered by divorce and forfeiture provisions that cause a share of stock to be substantially nonvested will be disregarded in determining whether a corporation’s shares confer identical rights to distribution and liquidation proceeds.<a href="#_ftn16" name="_ftnref16">16</a> An S corporation is generally not subject to tax at the corporate level.<a href="#_ftn17" name="_ftnref17">17</a> However, a tax is imposed at the corporate level under certain circumstances described in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="809">809</a>. When an S corporation disposes of property within 10 years after an election has been made, gain attributable to pre-election appreciation of the property (built in gain) is taxed at the corporate level to the extent such gain does not exceed the amount of taxable income imposed on the corporation if it were not an S corporation.<a href="#_ftn18" name="_ftnref18">18</a> ARRA 2009 provided that, in the case of a taxable year beginning in 2011, no tax is imposed on the built in gain if the fifth taxable year of the 10-year recognition period precedes such taxable year. Like a partnership, an S corporation computes its taxable income similarly to an individual, except that certain personal and other deductions (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of the new QBI deduction) are allowed to a shareholder but not to the S corporation, and the corporation may elect to amortize organizational expenses.<a href="#_ftn19" name="_ftnref19">19</a> Each shareholder then reports on his individual return his proportionate share of the corporation’s items of income, loss, deductions and credits. These items retain their character on pass-through.<a href="#_ftn20" name="_ftnref20">20</a> Certain items of income, loss, deduction or credit must be passed through as separate items because they may have an effect on each individual shareholder’s tax liability. For example, net capital gains and losses pass through as such to be included with the shareholder’s own net capital gain or loss. Any gains and losses on certain property used in a trade or business are passed through separately to be aggregated with the shareholder’s other IRC Section 1231 gains and losses. (Gains passed through are reduced by any tax at the corporate level on gains.) Miscellaneous itemized deductions pass through to be combined with the individual’s miscellaneous deductions for purposes of the 2 percent floor on such deductions (these deductions were suspended from 2018-2025). Charitable contributions pass through to shareholders separately subject to the individual shareholder’s percentage limitations on deductibility. Tax-exempt income passes through as such. Items involving determination of credits pass through separately.<a href="#_ftn21" name="_ftnref21">21</a> Before pass-through, each item of passive investment income is reduced by its proportionate share of the tax at the corporate level on excess net passive investment income.<a href="#_ftn22" name="_ftnref22">22</a> Items that do not need to be passed through separately are aggregated on the corporation’s tax return and each shareholder reports his share of such non-separately computed net income or loss on his individual return.<a href="#_ftn23" name="_ftnref23">23</a> Items of income, deductions, and credits (whether or not separately stated) that flow through to the shareholder are subject to the “passive loss” rule (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8009">8009</a> through Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8020">8020</a>) if the activity is passive with respect to the shareholder (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8010">8010</a>). Apparently, items taxed at the corporate level are not subject to the passive loss rule unless the corporation is either closely held or a personal service corporation (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8009">8009</a>). See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of how the deduction for business interest was impacted by the 2017 Tax Act. Thus, whether amounts are distributed to them or not, shareholders are taxed on the corporation’s taxable income. Shareholders take into account their shares of income, loss, deduction and credit on a per-share, per-day basis.<a href="#_ftn24" name="_ftnref24">24</a> The S corporation income must also be included on a current basis by shareholders for purposes of the estimated tax provisions (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="648">648</a>).<a href="#_ftn25" name="_ftnref25">25</a> The Tax Court determined that when an S corporation shareholder files for bankruptcy, all the gains and losses for that year flowed through to the bankruptcy estate. The gains and losses should not be divided based on the time before the bankruptcy was filed.<a href="#_ftn26" name="_ftnref26">26</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. See IRC §§ 1361, 1362, 1363. <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 1361. <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 1361(c)(1). <a href="#_ftnref4" name="_ftn4">4</a>. IRC §§ 1361(c)(2), 1361(d). <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 1361(d). <a href="#_ftnref6" name="_ftn6">6</a>. IRC § 1361(e). <a href="#_ftnref7" name="_ftn7">7</a>. IRC § 1361(c)(2)(B)(v). <a href="#_ftnref8" name="_ftn8">8</a>. Treas. Reg. § 1.1361-1(m)(4). <a href="#_ftnref9" name="_ftn9">9</a>. Treas. Reg. § 1.1361-1(h)(3)(i)(F). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 1361(e). <a href="#_ftnref11" name="_ftn11">11</a>.  Treas. Reg. § 1.1361-1(m)(1)(iii). <a href="#_ftnref12" name="_ftn12">12</a>.  IRC § 641(c). <a href="#_ftnref13" name="_ftn13">13</a>.  IRC §§ 1361(c)(2)(B)(v), 1361(b)(1)(C). <a href="#_ftnref14" name="_ftn14">14</a>.  Treas. Reg. § 1.1361-1(l)(1). <a href="#_ftnref15" name="_ftn15">15</a>.  Treas. Reg. § 1.1361-1(l)(2)(iii). See IRC §§ 1361, 1362. <a href="#_ftnref16" name="_ftn16">16</a>.  Treas. Reg. § 1.1361-1(l)(2)(iii)(B). <a href="#_ftnref17" name="_ftn17">17</a>.  IRC § 1363(a). <a href="#_ftnref18" name="_ftn18">18</a>.  IRC § 1374. <a href="#_ftnref19" name="_ftn19">19</a>.  IRC § 1363(b). <a href="#_ftnref20" name="_ftn20">20</a>.  IRC §§ 1366(a), 1366(b). <a href="#_ftnref21" name="_ftn21">21</a>.  IRC § 1366(a)(1). <a href="#_ftnref22" name="_ftn22">22</a>.  IRC § 1366(f)(3). <a href="#_ftnref23" name="_ftn23">23</a>.  IRC § 1366(a). <a href="#_ftnref24" name="_ftn24">24</a>.  IRC § 1377(a). <a href="#_ftnref25" name="_ftn25">25</a>.  Let. Rul. 8542034. <a href="#_ftnref26" name="_ftn26">26</a>.  Williams v. Commissioner, 123 TC 144 (2004). </div></div>

March 13, 2024

812 / How is a “personal service corporation” taxed?

<div class="Section1">Editor’s Note: The 2017 Tax Act eliminated the special tax treatment that previously applied to personal service corporations. As such, these corporations are now subject to the same flat 21 percent tax rate that applies to C corporations.</div> <div class="Section1"> Prior to 2018, certain personal service corporations were taxed at a flat rate of 35 percent.<a href="#_ftn1" name="_ftnref1">1</a> In effect, this meant that the benefit of the graduated corporate income tax rates was not available. For tax years beginning after December 31, 2017, personal service corporations are taxed at the 21 percent corporate rate. A personal service corporation for this purpose is a corporation in which substantially all corporate activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. In addition, substantially all of the stock must be owned (1) directly by employees, retired employees, or their estates or (2) indirectly through partnerships, S corporations, or qualified personal service corporations.<a href="#_ftn2" name="_ftnref2">2</a> IRC Section 269A permits the IRS to reallocate income, deductions, credits, exclusions, and other allowances (to the extent necessary to prevent avoidance or evasion of federal income tax) between a personal service corporation (PSC) and its employee-owners if the corporation is formed for the principal purpose of securing tax benefits for its employee-owners (i.e., more than 10 percent shareholder-employees after application of attribution rules) and substantially all of its services are performed for a single other entity. For purposes of IRC Section 269A, a personal service corporation is a corporation the principal activity of which is the performance of personal services and such services are substantially performed by the employee-owners.<a href="#_ftn3" name="_ftnref3">3</a> A professional basketball player was considered to be an employee of an NBA team, not his personal service corporation, and all compensation from the team was taxable to him individually, even though his PSC had entered into a contract with the team for his personal services.<a href="#_ftn4" name="_ftnref4">4</a> In addition, special rules apply to the tax year that may be used by a personal service corporation (as defined for purposes of IRC Section 269A, except that all owner-employees are included and broader attribution rules apply).<a href="#_ftn5" name="_ftnref5">5</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 11(b)(2), prior to repeal by Pub. Law No. 115-97 (the 2017 Tax Act). <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 448(d)(2). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 269A(b)(1). <a href="#_ftnref4" name="_ftn4">4</a>. Leavell v. Commissioner, 104 TC 140 (1995). <a href="#_ftnref5" name="_ftn5">5</a>. IRC §§ 441(i), 444. </div>

March 13, 2024

809 / Under what circumstances may an S corporation be taxed at the corporate level?

<div class="Section1">For S elections made after December 17, 1987, a corporation switching from C corporation status to S corporation status may also be required to recapture certain amounts at the corporate level in connection with goods previously inventoried under a LIFO method.<a href="#_ftn1" name="_ftnref1">1</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of the changes introduced by the 2017 Tax Act.<div class="Section1"> In addition, a tax is imposed at the corporate level on excess “net passive income” of an S corporation (passive investment income reduced by certain expenses connected with the production of such income) but only if the corporation, at the end of the tax year, has accumulated earnings and profits (either carried over from a year in which it was a nonelecting corporation or due to an acquisition of a C corporation), and if passive investment income exceeds 25 percent of gross receipts. The rate is the highest corporate rate (currently 21 percent, decreased from 35 percent prior to 2018).<a href="#_ftn2" name="_ftnref2">2</a> “Passive investment income” for this purpose is rents, royalties, dividends, interest, and annuities.<a href="#_ftn3" name="_ftnref3">3</a> However, passive investment income does not include rents for the use of corporate property if the corporation also provides substantial services or incurs substantial cost in the rental business,<a href="#_ftn4" name="_ftnref4">4</a> or interest on obligations acquired from the sale of a capital asset or the performance of services in the ordinary course of a trade or business of selling the property or performing the services. Also, passive investment income does not include gross receipts derived in the ordinary course of a trade or business of lending or financing; dealing in property; purchasing or discounting accounts receivable, notes, or installment obligations; or servicing mortgages.<a href="#_ftn5" name="_ftnref5">5</a> Regulations provide that if an S corporation owns 80 percent or more of a C corporation, passive investment income does not include dividends from the C corporation to the extent the dividends are attributable to the earnings and profits of the C corporation derived from the active conduct of a trade or business.<a href="#_ftn6" name="_ftnref6">6</a> If amounts are subject to tax both as built-in gain and as excess net passive income, an adjustment will be made in the amount taxed as passive income.<a href="#_ftn7" name="_ftnref7">7</a> Also, tax is imposed at the corporate level if investment credit attributable to years for which the corporation was not an S corporation is required to be recaptured.<a href="#_ftn8" name="_ftnref8">8</a> Furthermore, an S corporation may be required to make an accelerated tax payment on behalf of its shareholders, if the S corporation elects not to use a required taxable year.<a href="#_ftn9" name="_ftnref9">9</a> The corporation is also subject to estimated tax requirements with respect to the tax on built in gain, the tax on excess net passive income and any tax attributable to recapture of investment credit.<a href="#_ftn10" name="_ftnref10">10</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 1363(d). <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 1375(a). <a href="#_ftnref3" name="_ftn3">3</a>. IRC §§ 1362(d)(3), 1375(b)(3). <a href="#_ftnref4" name="_ftn4">4</a>. See Let. Ruls. 9837003, 9611009, 9610016, 9548012, 9534024, 9514005. <a href="#_ftnref5" name="_ftn5">5</a>. Treas. Reg. § 1.1362-2(c)(5). <a href="#_ftnref6" name="_ftn6">6</a>. Treas. Reg. § 1.1362-8(a). <a href="#_ftnref7" name="_ftn7">7</a>. IRC § 1375(b)(4). <a href="#_ftnref8" name="_ftn8">8</a>. IRC § 1371(d). <a href="#_ftnref9" name="_ftn9">9</a>. IRC § 7519. <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 6655(g)(4). </div></div>

March 13, 2024

814 / How is the income from a partnership taxed?

<div class="Section1">Editor’s Note: See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of the changes to pass-through taxation that were implemented under the 2017 tax reform legislation.<div class="Section1"> With the exception of certain publicly traded partnerships, a partnership, as such, is not taxed.<a href="#_ftn1" name="_ftnref1">1</a> However, the partnership must file an information return on Form 1065, showing taxable ordinary income or loss and capital gain or loss. The partnership is regarded as an entity for the purpose of computing taxable income, and business expenses of the partnership may be deducted. In general, prior to the 2017 Tax Act, taxable income was computed in the same manner as for individuals; but the standard deduction, personal exemptions, and expenses of a purely personal nature are not allowed.<a href="#_ftn2" name="_ftnref2">2</a> The deduction for production activities may also have been allowed prior to its repeal for tax years beginning in 2018 and beyond (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="798">798</a>). Each partner must report his share of partnership profits, whether distributed or not, on his individual return. A partner’s distributive share is determined either on the basis of the partner’s interest or by allocation under the partnership agreement. Allocation by agreement must have a “substantial economic effect.” Special allocation rules apply where the partner’s interest changes during the year.<a href="#_ftn3" name="_ftnref3">3</a> A person is a partner if he owns a capital interest in a partnership in which capital is a material income-producing factor, whether he acquired his interest by purchase or gift. Generally, such a person will be taxable on his share of partnership profits. If capital is not an income-producing factor, the transfer of a partnership interest to a family member may be disregarded as an ineffective assignment of income, rather than an assignment of property from which income is derived. Where an interest is acquired by gift (an interest purchased by one family member from another is considered to have been acquired by gift), allocation of income among the partners according to the partnership agreement will not control to the extent that: (1) it does not allow a reasonable salary for the donor of the interest; or (2) the income attributable to the capital share of the donee is proportionately greater than the income attributable to the donor’s capital share.<a href="#_ftn4" name="_ftnref4">4</a> The transfer must be complete and the family member donee must have control over the partnership interest consistent with the status of partner. If he is not old enough to serve in the capacity of partner, his interest must be controlled by a fiduciary for his benefit. A “qualified joint venture” that is carried out by two spouses may elect to treat their business as two sole proprietorships and not as a partnership. A qualified joint venture is any joint venture conducting a trade or business where the only owners are the two spouses, both spouses materially participate in the business, and both spouses elect to opt out of the partnership taxation rules. Items of income, gain, loss, deduction, and credit must be divided between the spouses according to their respective interests in the business.<a href="#_ftn5" name="_ftnref5">5</a> A partnership which is traded on an established securities market, known as a publicly traded partnership, is taxed differently than a partnership in some instances.<a href="#_ftn6" name="_ftnref6">6</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for a discussion of how the deduction of business interest is treated under the 2017 Tax Act. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 701. <a href="#_ftnref2" name="_ftn2">2</a>.  IRC §§ 703(a), 63(c)(6)(D). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC §§ 706(d), 704(b). <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 704(e). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 761(f). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 7704. </div></div>

March 13, 2024

800 / How was a corporation’s alternative minimum tax calculated prior to repeal by the 2017 tax reform?

<div class="Section1">Editor’s Note: The 2017 tax reform legislation repealed the corporate alternative minimum tax (AMT) for tax years beginning in 2018 and thereafter. The 2020 CARES Act further modified the rules governing use of existing AMT credits (see heading below).<div class="Section1"> Editor’s Note: The Inflation Reduction Act of 2022 adds a new 15 percent corporate alternative minimum tax to ensure that corporations with at least $1 billion in profits would be subject to a minimum 15 percent income tax rate. The tax applies to any corporation with an average annual adjusted financial statement income that exceeds $1 billion over any consecutive three-year period preceding the current tax year. The 15 percent rate is applied to the company’s “book income,” rather than adjusted gross income as reported to the IRS, in an effort to prevent corporations from using deductions and credits to escape taxation. The law requires corporations with at least $1 billion in earnings to determine their tax liability in two ways. First, the corporation calculates taxes using the existing 21 percent rate structure, using currently available deductions and credits. Second, they calculate tax liability by applying the 15 percent rate to their book income as reported to shareholders and investors on financial statements. The corporation then owes whichever figure is higher. Prior to 2018, a corporate taxpayer was required to calculate its liability under the regular tax and a tentative minimum tax, then add to its regular tax so much of the tentative minimum tax as exceeds its regular tax. The amount added was the alternative minimum tax.<a href="#_ftn1" name="_ftnref1">1</a> To calculate its alternative minimum tax (AMT), a corporation first calculated its “alternative minimum taxable income” (AMTI).<a href="#_ftn2" name="_ftnref2">2</a> Also, the corporation calculated its “adjusted current earnings” (ACE), increasing its AMTI by 75 percent of the amount by which ACE exceeded AMTI (or possibly reducing its AMTI by 75 percent of the amount by which AMTI exceeded ACE).<a href="#_ftn3" name="_ftnref3">3</a> The tax itself was a flat 20 percent of AMTI.<a href="#_ftn4" name="_ftnref4">4</a> Each corporation received a $40,000 exemption; however, the exemption amount was reduced by 25 percent of the amount by which AMTI exceeded $150,000 (thus phasing out completely at $310,000).<a href="#_ftn5" name="_ftnref5">5</a> AMTI is regular taxable income determined with certain adjustments and increased by tax preferences.<a href="#_ftn6" name="_ftnref6">6</a> Tax preferences for corporate taxpayers are the same as for other taxpayers. Adjustments to income included the following: (1) property was generally depreciated under a less accelerated or a straight line method over a longer period, except that a longer period was not required for property placed in service after 1998; (2) mining exploration and development costs were amortized over 10 years; (3) a percentage of completion method was required for long-term contracts; (4) net operating loss deductions were generally limited to 90 percent of AMTI (although some relief was available in 2001 and 2002); (5) certified pollution control facilities were depreciated under the alternative depreciation system except those that were placed in service after 1998, which would use the straight line method; and (6) the adjustment based on the corporation’s adjusted current earnings (ACE).<a href="#_ftn7" name="_ftnref7">7</a> To calculate ACE, a corporation began with AMTI (determined without regard to ACE or the AMT net operating loss) and made additional adjustments. These adjustments included adding certain amounts of income that were includable in earnings and profits but not in AMTI (including income on life insurance policies and receipt of key person insurance death proceeds). The amount of any such income added to AMTI was reduced by any deductions that would have been allowed in calculating AMTI had the item been included in gross income. The corporation was generally not allowed a deduction for ACE purposes if that deduction would not have been allowed for earnings and profits purposes. However, certain dividends received by a corporation were allowed to be deducted. Generally, for property placed into service after 1989 but before 1994, the corporation was required to recalculate depreciation according to specified methods for ACE purposes. For ACE purposes, earnings and profits were adjusted further for certain purposes such as the treatment of intangible drilling costs, amortization of certain expenses, installment sales, and depletion.<a href="#_ftn8" name="_ftnref8">8</a> Application of the adjustments for ACE with respect to life insurance is explained at Q <a href="javascript:void(0)" class="accordion-cross-reference" id="316">316</a>. A corporation subject to the AMT in one year could have been allowed a minimum tax credit against regular tax liability in subsequent years. The credit was equal to the excess of the adjusted net minimum taxes imposed in prior years over the amount of minimum tax credits allowable in prior years.<a href="#_ftn9" name="_ftnref9">9</a> However, the amount of the credit could not be greater than the excess of the corporation’s regular tax liability (reduced by certain credits such as certain business related credits and certain investment credits) over its tentative minimum tax.<a href="#_ftn10" name="_ftnref10">10</a> Because the 2017 Tax Act eliminated the corporate AMT, corporate taxpayers with existing AMT credit from a prior year may offset regular tax liability with the credit for any taxable year. Existing AMT credits will be refundable for tax years after 2017 and before 2022 in an amount equal to 50 percent (100 percent before 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability (this basically means that the full amount of the credit will be available before 2022).<a href="#_ftn11" name="_ftnref11">11</a> But see CARES Act below. CARES Act As noted above, the 2017 tax reform legislation generally repealed the corporate AMT, but also permitted corporations to continue claiming a minimum credit for prior year AMT paid. The credit can generally be carried forward to offset corporate tax liability in a later year. The CARES Act eliminates certain limitations that applied to the carryover provision, so that corporations could claim refunds for their unused AMT credits for the first tax year that began in 2018 (i.e., the corporation was required to take the entire amount of the refundable credit for 2018).<a href="#_ftn12" name="_ftnref12">12</a> The corporation must submit the application for refund before December 31, 2020. The IRS implemented a temporary procedure that allowed taxpayers to fax Form 1139 and Form 1045 to get faster refunds related to prior year AMT credits and NOL deductions. The fax procedures appled only to elections under CARES Act Section 2303 (NOLs) and Section 2305 (AMT credit). Forms were faxed to 844-239-6236 (Form 1139) or 844-239-6236 (Form 1045). The same forms could be used for both claims, and the IRS advised that the form instructions could be disregarded pending release of revised instructions.<a href="#_ftn13" name="_ftnref13">13</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. IRC §§ 55-59. <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 55(b)(2). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 56(g). <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 55(b)(1)(B). <a href="#_ftnref5" name="_ftn5">5</a>. IRC §§ 55(d)(2), 55(d)(3). <a href="#_ftnref6" name="_ftn6">6</a>. IRC § 55(b)(2). <a href="#_ftnref7" name="_ftn7">7</a>. IRC §§ 56(a), 56(c), 56(d). <a href="#_ftnref8" name="_ftn8">8</a>. IRC. § 56(g). <a href="#_ftnref9" name="_ftn9">9</a>. IRC § 53(b). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 53(c). <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 53(e). <a href="#_ftnref12" name="_ftn12">12</a>.  IRC § 53(e). <a href="#_ftnref13" name="_ftn13">13</a>.  See IRS FAQ: <a href="https://www.irs.gov/newsroom/temporary-procedures-to-fax-certain-forms-1139-and-1045-due-to-covid-19">https://www.irs.gov/newsroom/temporary-procedures-to-fax-certain-forms-1139-and-1045-due-to-covid-19</a>. </div></div>

March 13, 2024

798 / How is a corporation taxed?

<div class="Section1">Any corporation, including a professional corporation or association, is considered a C corporation, taxable under the following rules, unless an election is made to be treated as an S corporation. Graduated Tax Rates Under the 2017 Tax Act, all corporations pay a flat income tax of 21 percent for tax years beginning after 2017 (these rates are not set to expire). There is no special rate for personal service corporations. Prior to 2018, a corporation paid tax according to a graduated rate schedule where the rates ranged from 15 percent to 35 percent.<a href="#_ftn1" name="_ftnref1">1</a> A “personal service corporation” was subject to a different income tax rate prior to 2018. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="812">812</a>. <hr> Planning Point: The reduced corporate tax rate may encourage many business owners to explore converting from a pass-through entity (taxed at the individual’s ordinary income tax rate) to a C corporation, but caution should be exercised in making this decision. This move could potentially be beneficial for businesses that retain a significant portion of their earnings each year (whether to grow the business through asset acquisitions or simply for investment purposes). Those earnings would be taxed at the 21 percent corporate income tax rate rather than (potentially) the highest 37 percent individual tax rate that applies to pass-through income. Despite this, when those funds are eventually distributed to shareholders, they will again be taxed as dividends (to which a maximum 23.8 percent tax may apply when considering the 3.8 percent investment income tax). The total effective tax rate works out to approximately 39.8 percent (higher than the maximum individual income tax rate). This second tax, however, can be deferred until a future date, allowing the corporation to use the funds in the meantime. In using this strategy, the accumulated earnings tax and personal holding company tax (both taxes designed to discourage corporations from retaining excess earnings beyond the reasonable needs of the business) must be considered. Corporations may also wish to consider reducing the “compensation” paid to owner-employees, as those payments (while deductible by the corporation) can be taxed at up to 37 percent (plus employment taxes) after the 21 percent corporate rate has been imposed. Dividends, while not deductible by the corporation, would only be subject to a 23.8 percent second tax upon distribution. S corporations that convert to C corporations and find that the move was ill-advised must also be aware that there is a five-year waiting period before it can convert back to S corporation status. <hr> Taxable income is computed for a corporation in much the same way as for an individual. Generally, a corporation may take the same deductions as an individual, except those of a personal nature (e.g., deductions for medical expenses). A corporation also does not receive a standard deduction. There are a few special deductions for corporations, however including a “dividends received deduction”. The 2017 Tax Act reduced the 80 percent dividends received deduction to 65 percent (for corporations that own at least 20 percent of the stock of another corporation) and reduced the otherwise applicable 70 percent dividends received deduction to 50 percent.<a href="#_ftn2" name="_ftnref2">2</a> Prior to 2018, the deduction was equal to 70 percent of dividends received from other domestic corporations, 80 percent of dividends received from a 20 percent owned company, and 100 percent for dividends received from affiliated corporations.<a href="#_ftn3" name="_ftnref3">3</a> For tax years ending after 2019 a corporation may deduct contributions to charitable organizations to the extent of 25 percent of taxable income (with certain adjustments).<a href="#_ftn4" name="_ftnref4">4</a> Generally, charitable contributions in excess of the percentage limit may be carried over for five years.<a href="#_ftn5" name="_ftnref5">5</a> Prior to 2018, a corporation was also allowed a deduction for production activities. Prior to its repeal by the 2017 Tax Act, this deduction was fully phased in (in 2010), and was equal to nine percent of a taxpayer’s qualified production activities income (or, if less, the taxpayer’s taxable income). The deduction was limited to 50 percent of the W-2 wages paid by the taxpayer for the year. The definition of “production activities” was broad and included construction activities, energy production, and the creation of computer software.<a href="#_ftn6" name="_ftnref6">6</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 11(b). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC §§ 243(a)(1), 243(c)(1). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 243. <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 170(b)(2); CARE Act § 2205(a)(2)B). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 170(d)(2). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 199, prior to repeal by Pub. Law No. 115-97 (the 2017 Tax Act). </div></div>

March 13, 2024

802 / What is the accumulated earnings tax?

<div class="Section1">Editor’s Note: The 2017 Tax Act limited the members of a controlled group of corporations (the members of which are determined as of December 31 of the relevant year) to a single $250,000 amount in order to compute the accumulated earnings credit ($150,000 if any member of the group is a service organization in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting).<a href="#_ftn1" name="_ftnref1">1</a> This amount must be divided equally among the members of the controlled group unless future regulations provide that unequal allocations are permissible.<a href="#_ftn2" name="_ftnref2">2</a><div></div><div class="Section1"> A corporation is subject to a penalty tax, in addition to the otherwise applicable corporate income tax, if, for the purpose of preventing the imposition of income tax upon its shareholders, it accumulates earnings instead of distributing them.<a href="#_ftn3" name="_ftnref3">3</a> The tax is 20 percent of the corporation’s accumulated taxable income (15 percent for tax years beginning prior to 2013).<a href="#_ftn4" name="_ftnref4">4</a> Accumulated taxable income is taxable income for the year (after certain adjustments) less the federal income tax, dividends paid to stockholders (during the taxable year or within 2½ months after the close of the taxable year), and the “accumulated earnings credit.”<a href="#_ftn5" name="_ftnref5">5</a> <hr> Planning Point: IRS officials have noted that additional guidance may be needed on the application of the accumulated earnings tax in the wake of tax reform. The 2017 tax reform legislation lowered the corporate tax rate from 35 percent to 21 percent, potentially providing motivation for some companies to convert to C corporation status rather than attempt to interpret the complicated pass-through provisions that apply post-reform. However, the legislation did not modify the accumulated earnings tax, which applies a 20 percent penalty tax to undistributed corporate earnings and profits in excess of the reasonable business needs of the company. This “reasonableness” standard can be difficult to interpret and could require additional guidance in the coming years, as more businesses may attempt to take advantage of lower corporate rates by simply distributing fewer dividends to business owners. <hr> The tax can be imposed only upon amounts accumulated beyond those required to meet the reasonable needs of the business since an accumulated earnings credit, generally equal to this amount, is allowed. A corporation must demonstrate a specific, definite and feasible plan for the use of the accumulated funds in order to avoid the tax.<a href="#_ftn6" name="_ftnref6">6</a> The use of accumulated funds for the personal use of a shareholder and his family is evidence that the accumulation was to prevent the imposition of income tax upon its shareholders.<a href="#_ftn7" name="_ftnref7">7</a> In deciding whether a family owned bank was subject to the accumulated earnings tax, the IRS took into account the regulatory scheme the bank was operating under to determine its reasonable needs.<a href="#_ftn8" name="_ftnref8">8</a> Most corporations are allowed a minimum accumulated earnings credit equal to the amount by which $250,000 ($150,000 in the case of service corporations in health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting) exceeds the accumulated earnings and profits of the corporation at the close of the preceding taxable year.<a href="#_ftn9" name="_ftnref9">9</a> Consequently, an aggregate of $250,000 ($150,000 in the case of the above listed service corporations) may be accumulated for any purpose without danger of incurring the penalty tax. Tax-exempt income is not included in the accumulated taxable income of the corporation but will be included in earnings and profits in determining whether there has been an accumulation beyond the reasonable needs of the business.<a href="#_ftn10" name="_ftnref10">10</a> However, a distribution in redemption of stock to pay death taxes which is treated as a dividend does not qualify for the “dividends paid” deduction in computing accumulated taxable income (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="300">300</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="303">303</a>).<a href="#_ftn11" name="_ftnref11">11</a> The accumulated earnings tax applies to all C corporations, without regard to the number of shareholders in taxable years beginning after July 18, 1984.<a href="#_ftn12" name="_ftnref12">12</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. Under IRC § 535(c). <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 1561(a). <a href="#_ftnref3" name="_ftn3">3</a>. IRC §§ 531-537; GPD, Inc. v. Commissioner, 508 F. 2d 1076, 75-1 USTC ¶ 9142 (6th Cir. 1974). <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 531, as amended by ATRA. <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 535. <a href="#_ftnref6" name="_ftn6">6</a>. Eyefull Inc. v. Commissioner, TC Memo 1996-238. <a href="#_ftnref7" name="_ftn7">7</a>. Northwestern Ind. Tel. Co. v. Commissioner, 127 F. 3d 643, 97-2 USTC ¶ 50,859 (7th Cir. 1997). <a href="#_ftnref8" name="_ftn8">8</a>. TAM 9822009. <a href="#_ftnref9" name="_ftn9">9</a>. IRC § 535(c)(2). <a href="#_ftnref10" name="_ftn10">10</a>.  Rev. Rul. 70-497, 1970-2 CB 128. <a href="#_ftnref11" name="_ftn11">11</a>.  Rev. Rul. 70-642, 1970-2 CB 131. <a href="#_ftnref12" name="_ftn12">12</a>.  IRC § 532(c). </div></div>