2002-2003 S Corporation Update

Traum, Sydney S

Tax law is constantly evolving and changing. The following is a summary of some recent developments regarding Subchapter S of the Internal Revenue Code. This article is adapted from material written by the author for Aspen Publishers' quarterly supplemented loose-leaf service entitled The S Corporation: Planning & Operation. All rights are reserved.

Tax Legislation

Jobs and Growth Tax Relief Reconciliation Act Of 2003

While the new law does not contain any provisions that make changes in Subchapter S, several of its provisions will directly affect S corporations. The reductions in income tax rates in excess of fifteen percent (15%) scheduled for 2004 and 2006 are accelerated to 2003, resulting in new tax rates for individuals of 25%, 28%, 33%, and 35% (reduced from 27%, 30%, 35%, and 38.6%). Thus, income flowing through to individuals from S corporations may be taxed at lower rates.

The maximum tax rate on dividends paid by corporations to individuals and on certain capital gains realized by individuals is reduced to 15% in years 2003 through 2008. For taxpayers in the 10% and 15% ordinary income tax brackets, the rate on dividends and certain capital gains is reduced to 5% in 2003 through 2007 and zero in 2008. The new rates apply to capital gains recognized on or after May 6, 2003 and to dividends received on or after January 1, 2003. This presents a window of opportunity for those S corporations that have accumulated earning and profits (E & P) because they may distribute the accumulated E & P to shareholders and have the maximum tax rate of 15% apply to such distributions. The presence of accumulated earnings and profits in S corporations that have too much passive investment income can cause additional tax and loss of S corporation status.

The amount of investment that may be immediately deducted by a small business as Section 179 depreciation is increased from $25,000 to $100,000 beginning in 2003. The amount of investment qualifying for the immediate deduction begins to phase out for small business with investments in excess of $400,000 (increased from $200,000). Both of these numbers are indexed for inflation beginning in 2004. The changes are effective for taxable years beginning in 2003, 2004, and 2005.

There were a number of S corporation items in the bill as passed by the Senate. However, the conference committee deleted all of those provisions.

Final Regulations

Testamentary Trusts as S Corporation Shareholders

The July 17, 2003 Federal Register contains final regulations relating to a qualified subchapter S trust (QSST) election under Code Section 1361. The final regulations are substantially the same as those proposed in 2001. The new regulations recognize that certain trusts may elect under Code Section 645 to be treated as part of a decedent's estate and thus the two year grace period for such trusts begins when the Section 645 election period ends.

Basis Limitation on Shareholders' Losses

Loss-Pass-Through Deductions

The Eleventh Circuit Court of Appeals affirmed the Tax Court decision in Thomas v. Commissioner, 2003-1 USTC paragraph 50,460 (April 23, 2003), affirming TC Memo 2002-108. The appeals court affirmed the Tax Court's findings that the shareholders did not increase their basis in the S corporation stock by virtue of payments from a related entity. The court distinguished this case from those involving incorporated pocket books. Here, the transactions were originally characterized on the books of the entities as intercorporate loans. Only after the IRS commenced its audit did the classification on the corporation's books change to show loans from the shareholders.

Incorporated Pocketbook

The Third Circuit accepted the Tax Court's conclusion in Daniel J. Culnen, TC Memo 2000-139, rev'd & remanded, 2002-1 USTC ¶ 50,200 (3rd Circuit, 1/7/02), that the taxpayer had proven his basis with respect to the investment in the S corporation. Payments made by a related corporation that was deemed to be Culnen's incorporated pocketbook were added to Culnen's basis. However, it reversed and remanded the case because the Tax Court had reduced the amount of the loss suffered by the S corporation without giving the taxpayer adequate notice that this would be an issue. Accordingly, judgment was entered in favor of the taxpayer.

Back to Back Loans

In Oren v Commissioner, TC Memo 2002-172, the Tax Court refused to allow basis in a situation where the taxpayer borrowed money from a related corporation and then loaned it to his S corporation, in an attempt to create basis, which then in turn loaned the money back to the corporation that had loaned the money to the shareholder. The various disbursements were held to be the equivalent of offsetting bookkeeping entries, even though they occurred in the form of checks and a wire transfer. Because all of the entities were related, the court held that the shareholder did not make an actual economic outlay which the court said is necessary to increase basis in an S corporation, even if the shareholder has made a direct loan to the corporation. The court did distinguish this from situations where an independent third party lender was involved.

Mergers

Field Service Advice (FSA) 200223052, released on June 7, 2002, holds that a shareholder of a target S corporation that is merged into a C corporation, who is also a shareholder of the acquiring C corporation, is permitted to apply S corporation losses suspended under the basis limitation rule against the shareholder's historic basis in the C corporation stock. (See Regulations Section 1.1366-2(c).) This, in effect, allows the C corporation basis to be utilized in permitting S corporation losses to flow through to the shareholder in the S corporation's post-termination transition period. Regulations Section 1.1377-2(b) specifically provides that a post-termination transition period arises the day after the last day that an S corporation was in existence, if a C corporation acquires the assets of an S corporation in a transaction to which code section 381(a)(2) applies, such as a merger which is an "A" reorganization.

Basis Reduced By Previously Deducted Losses In Excess of Basis

In Field Service Advice Memorandum (FSA) 200230030, the IRS held that the basis of the stock of an S corporation in an open year must be computed using previously deducted losses that exceeded the basis of the stock in years that were closed. The taxpayer had deducted losses in closed years that exceeded the basis of his stock. Nevertheless, the IRS concluded in the FSA that these excess deductions could reduce basis with respect to a year that is open for purposes of the statute of limitations on assessment. This holding may be contrary to Technical Advice Memorandum (TAM) 9304004 which seemed to permit a taxpayer to carry over as a suspended loss the amount of loss in excess of his basis for stock and loans even though he had improperly deducted this loss in a prior year. The TAM was not discussed in the FSA.

F Reorganization

Effects of F Reorganization on S Corporation

Letter Ruling 200320013 involved a six step transaction in which an existing corporation became a subsidiary to a newly formed corporation owned by the same shareholder. The IRS ruled that this was an F reorganization and that no gain or loss would be recognized in the transaction. The basis and holding periods of the assets remain the same and the Section 1374 built-in gain of the existing corporation retained its character with respect to the resulting corporation.

Late Elections

Automatic Relief for Late Elections

Rev. Proc. 2003-43, 2003-23 IRB 998 (June 9, 2003) provides a simplified method for taxpayers to request relief for four different types of late elections. They are:

1) S corporation elections;

2) Electing small business trust (ESBT) elections;

3) Qualified subchapter S trust (QSST) elections; and

4) Qualified subchapter S subsidiary (QSub) elections.

The revenue procedure provides that certain eligible entities may be granted relief for failing to timely file these elections if the request for relief is filed within 24 months of the due date of the election and certain conditions are met. This revenue procedure supersedes Rev. Proc. 98-55. Use of the new revenue procedure does not require payment of a user fee. However, if a corporation or trust does not meet the requirements for relief under Rev. Proc. 2003-43, the taxpayer may request a private letter ruling from the Internal Revenue Service; but that will require a user fee. Upon receipt of a completed application requesting relief under the Revenue Procedure, the IRS will determine whether the requirements for granting additional time have been satisfied and will notify the entity of the result of this determination.

Extension for Filing Form 8023

Automatic Extension of Time To File Form 8023, Election Under Section 338 for Corporations Making Qualified Stock Purchases

Rev. Proc. 2003-33, 2003-16 IRB 803 (April 21, 2003), grants certain taxpayers an automatic extension of time to file elections on Form 8023. To obtain the automatic extension, the required filer or filers must file Form 8023 no later than 12 months after the discovery of the failure to file the election. In addition, a single statement, filed under penalties of perjury by all required filers, must be attached to the Form 8023 setting forth certain information. If the requirements of the revenue procedure are not met, then it may be necessary for the taxpayer to request a private letter ruling from the National office of the IRS in Washington. Use of the revenue procedure does not require a user fee. However, application for a private letter ruling does involve the payment of a user fee.

Payroll Taxes

S Corporation Dividends Recharacterized as Salaries

A number of recent cases have supported the IRS contention that S corporation distributions to shareholder-officers of closely held S corporations were salaries subject to payroll taxes. The Third Circuit Court of Appeals affirmed two Tax Court cases in Yeagle Drywall Co. v. Commissioner (3d Cir, 12/18/02). In addition, six Tax Court memorandum decisions were issued by Judge Cohen on February 26, 2003, all with the same result. These cases hold that an officer of a corporation will be treated as an employee unless he renders no services or only minor services to the corporation and does not receive any remuneration. The memorandum decisions and their citations are as follows:

Sole Shareholder-Officer Held to be an Employee

In Joseph M. Grey Public Accountant, P.C. v. Commissioner, 119 TC 121 (9/16/02), the Tax Court held that the sole shareholder-president of the corporation was an employee for purposes of payroll taxes. Mr. Grey claimed that he was an independent contractor and not an employee of his wholly owned corporation. His duties included managing the corporation and performing all tax services for the corporation's clients. The only evidence that petitioner presented that Mr. Grey may have provided services in a capacity other than as president were the Forms 1099-MISC reporting non-employee compensation. The Tax Court gave these forms no weight because they were prepared only for tax purposes and were not corroborated by other evidence.

Statutory Mergers and Consolidations

Mergers Involving QSubs

The Federal Register of January 24, 2003 proposes new regulations which also serve as temporary regulations regarding mergers and consolidations of disregarded entities, such as qualified Subchapter S trusts (QSubs). Temporary Regulation §1.368-2T also serves as a proposed regulation, and is effective for the transactions occurring on or after January 24, 2003 although taxpayers may apply these regulations to earlier transactions if they apply them in whole, but not in part.

Entity Classification Election

Extension of Time to File Form 8832

Rev. Proc. 2002-59, 2002-39 1RB 615, permits a newly formed entity to file a late Form 8832, Entity Classification Election, if certain conditions are met. The revenue procedure only applies to an initial classification for a newly formed entity which has not timely filed its Form 8832 if the due date of the federal tax return for the entity's desired classification (excluding extensions) for the taxable year beginning with the date of the entity's formation has not passed (regardless of whether a federal tax return is actually required to be filed) and the entity has reasonable cause for its failure to timely make the initial entity classification election.

S Corporation Merger into LLC that Elects to be Treated as a Corporation in an F Reorganization Will Not Terminate S Election

In Letter Ruling 200248023, the IRS considered the situation of an S corporation that was merged into an LLC, with the LLC as the surviving entity. The LLC intended to be treated as an S corporation for federal tax purposes but it failed to timely file Form 8832, which would allow it to be treated as a corporation. In the Letter Ruling, the IRS granted the LLC additional time in which to make the entity classification election. It further provided that if the merger constitutes a tax free reorganization under Section 368(a)(1)(F), that the reorganization will not adversely affect the LLC's status as an S corporation and that if the LLC meets the requirements of Subchapter S, the S corporation's election will continue to be in effect and would be applicable to the LLC without the necessity of filing a new Subchapter S election on behalf of the LLC.

Section 444 Election

Refunds of Required Payments

S corporations that make a Section 444 election on Form 8716 to use a September, October, or November fiscal year must file Form 8752, Required Payment or Refund Under Section 7519, and pay the amount required or request a refund. In Voss Industries, Inc. v. US (Northern District of Ohio (1/27/03)), the taxpayer waited five years before filing a Form 8752 claiming a refund of $64,586 of its Section 7519 payment. The court agreed with the government's position that the monies paid to the IRS by an S corporation under Section 7519 should be treated as a tax. Thus, the statute of limitations provisions of Section 6511 apply and the refund claim was denied.

LIFO Inventory

Late Payment of LIFO Recapture Installment Payments

Notice 2003-4, 2003-3 1RB 294, provides information concerning the Federal tax consequences of a taxpayer's failure to timely make an installment payment attributable to the last-in, first-out (LIFO) recapture requirement of Code Section 1363(d). A C corporation that has LIFO inventory must include the LIFO recapture amount in its income for the last C year when it makes a Subschapter S election. The tax is due one quarter with that final C return and one quarter with each of the following three S corporation returns.

The notice states that a C corporation that fails to include a LIFO recapture amount in gross income for its last C corporation year may be liable for a 20% accuracy-related penalty under Section 6662. A corporation that fails to make a LIFO recapture installment payment by its required due date may be liable for a failure to pay penalty under Section 6651. Corporations that make LIFO recapture installment payments after the due date will be liable for interest under Section 6601. The notice also clarifies that failure to pay, or late payment of, a LIFO recapture installment payment due under Section 1363(d) does not cause any remaining unpaid installments to be accelerated and become due immediately.

LIFO Recapture Did Not Apply to S Corporation Partner

The Eleventh Circuit Court of Appeals reversed the Tax Court in Coggin Automotive Corporation v. Commissioner, 292 F.3rd 1326, reversing 115 TC 349 (2000). Coggin was a C corporation holding company that owned majority interests in five C corporation subsidiaries. The subsidiaries owned automobile dealerships and used the dollar-value LIFO method of accounting for inventory. As part of a plan to restructure its business operations, the shareholders of Coggin created six new S corporations to act as general partners in six new limited partnerships. Each subsidiary contributed its assets and liabilities (including inventory) in exchange for limited partnership interests and then the subsidiaries were liquidated into Coggin. Thus, Coggin became a limited partner in the limited partnerships. When Coggin elected Subchapter S status, the IRS claimed that the LIFO recapture amount of Section 1363(d) should be included in the taxable income of its last C year.

The Tax Court held that Coggin was deemed to own a pro rata share of the inventory owned by the partnerships of which it was a partner. This would have required the LIFO recapture tax to apply. The Eleventh Circuit Court of Appeals reversed the Tax Court, citing the plain meaning of the statute which requires that the corporation itself must own the LIFO inventory. The appellate court concluded its opinion with the statement that any potential windfall to holding companies must be cured by Congress, not the judiciary.

Employee Stock Ownership Plans (ESOPS)

The Internal Revenue Service has recently issued guidance dealing with the rules regarding ESOPs.

Rev. Rul. 2003-6, 2003-3 IRB 286, deals with the delayed effective date for the ESOP prohibited allocation rules. These rules limit the allocation of S corporation stock owned by an ESOP with respect to certain disqualified shareholders. The new provisions are generally effective for plan years beginning after 2004. However, plan years ending after March 14, 2001 will be governed by the new rules if the ESOP is established after March 14, 2001 or if the employer maintaining the ESOP was not an S corporation on that date. The new ruling is designed to prevent the use of shelf corporations and shelf ESOPs that were formed on or before March 14, 2001.

Rev. Proc. 2003-23, 2003-11 IRB 599 (3/17/03), permits some ESOPs to transfer shares to the IRA of a plan participant without causing the loss of Subchapter S status. An IRA is not a permitted shareholder. However, if certain conditions are met dealing with the immediate repurchase of the stock from the IRA, the ruling permits the S corporation status to remain intact.

Rev. Rul. 2003-27, 2003-11 IRB 597 (3/17/03), deals with the question of whether an ESOP owning shares of an S corporation is required to make the adjustments to basis that other S corporation shareholders are required to make. The ruling holds that these adjustments are required and that the adjusted basis of the S corporation stock will be utilized in determining the amount of income required to be recognized by a participant who receives a distribution of S corporation shares.

In the Federal Register of July 21, 2003, IRS issued temporary and proposed regulations to shut down abusive arrangements involving ESOPs holding stock in S corporations. Code Section 409(p), enacted in 2001, is designed to prevent the owners of an S corporation from using an ESOP to shelter business income from tax. It prohibits the ESOP from allocating its S corporation stock to certain controlling shareholders. Some taxpayers have attempted to avoid these prohibited allocations by giving former owners of the S corporation deferred compensation from a management company related to the S corporation or special rights to acquire assets of the S corporation. The new regulations will treat the deferred compensation and the special rights as "synthetic equity" - causing both income taxes and excise taxes to the S corporation's former owners.

Termination of S Corporation Status

Bankruptcy Did Not Terminate Status

In Mourad v. Commissioner, 121 TC No. 1 (7/2/03), the Tax Court held that the filing of a Chapter 11 bankruptcy petition did not terminate the S corporation's status. Thus, when the bankruptcy Trustee sold corporate assets to pay creditors, the corporation's gain was taxed to its sole shareholder.

Conversion to Limited Partnership May Cause Termination

Letter Ruling 200307079 illustrates a situation where an S corporation converted to a limited partnership under the revised uniform limited partnership act in order to reduce its state franchise tax. With the intent to continue to be treated as an S corporation, the limited partnership filed a Form 8832, Entity Classification Election, to be treated as an association taxable as a corporation. However, its attorneys advised the corporation that the conversion to a state limited partnership may have caused termination of the S corporation election because a state law limited partnership may be treated as having more than one class of stock. When this was brought to the taxpayer's attention, it converted back to a corporation.

IRS ruled that IF the conversion from a corporation to a limited partnership created a second class of stock, the consequent termination of the S corporation status was inadvertent. Therefore, IRS ruled that the entity could continue to be treated as an S corporation for the entire period it was a state law limited partnership. The IRS is studying the issue of whether a state law limited partnership electing to be classified as an association taxable as a corporation has more than one class of stock. Until they resolve this issue through published guidance, the IRS will not issue letter rulings on this question.

One Class of Stock Requirement

Disproportionate Distributions

Letter Ruling 200308035 presented a situation in which an S corporation planned to make current distributions of cash based on prior year share ownership. The proposed distributions would be remedial in nature to reflect distributions that would have been made in an earlier year for which tax returns were being amended. The IRS held that these planned distributions would not constitute a second class of stock threatening the S corporation election status.

Constructive Distributions

Nondeductible Legal Fees Paid by S Corporation Treated as a Constructive Distribution.

On November 27, 2002, the First Circuit Court of Appeals affirmed Capital Video Corp. v. Commissioner, TC Memo 2002-40. This was a case in which the Tax Court disallowed legal fees paid by an S corporation to defend its sole shareholder against various criminal indictments. The corporation and the shareholder had made "tribute payments" to the Gambino crime family in exchange for protection from other organized crime families. At the same time, the shareholder conspired with a Gambino crime family member to obstruct the IRS in collecting his taxes by issuing false Forms 1099. The corporation attempted to deduct as ordinary and necessary expenses the $423,101 it had paid as legal fees in connection with the criminal charges against its shareholder. The Tax Court and the First Circuit disallowed the legal fees as business expenses of the corporation. It found that the legal fees were related to the conspiracy to evade income taxes and were not related to the tribute payments made on behalf of the corporation. Therefore, the expenses were disallowed to the corporation and treated as constructive distributions to the shareholder. The same reasoning that prevented the corporation from deducting the payments also applied to the individual shareholder's tax return so that he could not deduct the legal fees as business expenses on his return.

Built-In Gains Tax

Payments for Use of Copyright Material Under Agreements Entered Into After Conversion Were Not Recognized Built-In Gain

In Letter Ruling 200240002, a corporation which owned certain copyrights was held not to have income subject to the built in gains tax with respect to agreements allowing the limited use of the copyright for agreements entered into after the conversion date. The ruling specifically did not express an opinion on what would happen with respect to agreements entered into prior to the conversion date.

Built-in Gains Tax Did Not Apply on Corporate Restructuring

In a Technical Advice Memorandum (TAM), the IRS reviewed the situation when the common parent of an affiliated group of corporations elected Subchapter S status and also elected to treat all of its subsidiaries as qualified Subchapter S subsidiaries (QSubs). Prior to the Subchapter S election, the corporation and its subsidiaries had filed consolidated income tax returns and had deferred the gross profit on intercompany sales of inventory until such merchandise was disposed of outside the group. The question was whether the deferred gains on the sale of inventory between members of the group would be included in the group's income when the parent corporation made an S election for itself and QSub elections for its subsidiaries. TAM 200247002 held that under the consolidated return regulations effective for transactions occurring in years beginning on or after July 12, 1995 the parent corporation must take into income the deferred amount on its final consolidated income tax return. Because the income was taken into account on the final consolidated return and not while the corporation was an S corporation, the built-in gains tax of Section 1374 could not apply to the recognized gain. The TAM also noted that because the intercompany sales that resulted in deferred gain increased the basis of the sold properties, the taxpayer will not have built-in gain subject to Section 1374 with respect to those properties, except to the extent that the value of such properties may have appreciated since the time of the intercompany sale that gave rise to the deferred gain.

Valuation of S Corporation Stock

Tax Affecting S Corporation Income.

The Supreme Court denied cert in Walter L. Gross, Jr. v. Commissioner, TC Memo 1999-254, affirmed 272 F.3d 333 (6th Cir., 11/19/2001), certiorari denied 537 US____ (10/7/02). The issue was the valuation of S corporation stock for gift tax purposes. The IRS expert determined a zero percent corporate tax rate was an appropriate assumption to make in determining the earnings of the S corporation available for distribution. He also ignored shareholder level taxes in arriving at his discount rate. Nevertheless, the Tax Court found that the IRS expert was more persuasive in his valuation testimony than was the taxpayer's expert.

Split Interests

Life Estate Created by Will Treated as QSST

The issue of whether a life estate can qualify as a QSST has lacked specific authority for many years. In Letter Ruling 200247030, this question was examined. Based on the information submitted, the IRS ruled that the life estate arrangement may qualify as a QSST and thus be a permitted shareholder for an S corporation. The ruling request contained a representation (under penalties of perjury) that under state law, the life tenant is a trustee or quasi-trustee and occupies a fiduciary relationship to the remaindermen. It stated that a life tenant is a trustee in the sense that he or she cannot injure or dispose of property to the detriment of the remaindermen's rights, but differs from a pure trustee in that the life tenant may use property for his or her own benefit. It was also represented that if the arrangement created under the will with respect to the stock is treated as a trust, then the arrangement would satisfy the requirements of a QSST. Under these circumstances, IRS held that the arrangement may be treated as a QSST, if the QSST election is made.

Interest on Deficiencies Not Deductible

Temporary Regulations Held Valid

In Robinson v. Commissioner, 119 TC 44 (9/5/02), the Tax Court, abandoning its prior position, held that temporary regulation sections 1.163-8T and 1.163-9T(b)(2)(i)(A) are valid. Robinson was followed in Fowler v. Commissioner, TC Memo 2002-223 (9/6/02). These temporary regulations provide that interest on tax deficiencies paid by an individual are personal interest and not deductible. Thus, if an S corporation has an audit and its income is increased, causing additional taxable income to the shareholders and a deficiency, the interest paid by the shareholders on the deficiency will not be deductible.

Hobby Loss Disallowance

Profit Motive

In Baldwin v. Commissioner, TC Memo 2002-162, the Tax Court disallowed deductions of an S corporation relating to a large tract of property on the Lake Superior shoreline. It held that the petitioner failed to prove by a preponderance of evidence that the corporation was engaged in the conduct of a trade or business under section 162 or that the corporation was engaged in an activity for profit.

However, the Tax Court ruled in favor of the taxpayers in Schwartz v. Commissioner, TC Memo 2003-86, involving an S corporation that owned a racing sailboat.

Validity of S Election

Taxpayer Challenges Validity Of S Election

In Baldwin v. Commissioner, TC Memo 2002-162, the taxpayer attempted to challenge the validity of the S corporation election for one of his corporations so that he would not have to report the increased income resulting from an IRS examination of the corporation's return. Because the taxpayer did not contest the validity of the S corporation status until one month before trial, the Tax Court disallowed the claim that the S corporation status was invalid, citing the duty of consistency.

Valuation of S Corporation Stock

Tax Affecting S Corporation Income

In Estate of Richte C. Heck, deceased v. Commissioner, TC Memo 2002-34 (February 5, 2002), the parties agreed that the income of the S corporation should not be tax affected, except for the 1.5% California state income tax on S corporations, in valuing the stock of an S corporation. An additional 10% discount was allowed for additional risks associated with S corporations and the lack of control minority status.

Passive Activity Loss Rules

Final Regs Issued On Self-Charged Interest

The August 21, 2002 Federal Register contained final regulations on the treatment of self-charged items of income and expense under section 469. The regulations recharacterize a percentage of certain interest income and expense as passive income and expense (self-charged items) when a taxpayer engages m a lending transaction with a partnership or an S corporation (pass-through entity) in which the taxpayer owns a direct or indirect interest and the loan proceeds are used in a passive activity. Similar rules apply to lending transactions between two identically owned pass-through entities.

Supplemental Opinion Issued By Tax Court

Following reversal of its original opinion in Hillman v. Commissioner, 114 TC 103 (2000), which held that self-charged rules should apply to management fees, the Tax Court in a supplemental opinion, 118 TC 323 (4/9/02), considered an alternative argument that the management fee income received and some portion of the management fee deductions claimed by the real estate pass-through entities were both passive or both nonpassive. The taxpayers reported that the management fee deductions were nonpassive and deductible from the management fee income. According to the Tax Court, in order to sustain that reporting position, the taxpayers needed to show that part of the real estate pass-through entity's deductions (expenses) were incurred in a separate trade or business rather than from the real estate activity, which is defined as passive by statute. This they could not do. Decision was entered in favor of the government.

Reprinted with permission from the Florida institute of CPAs. Copyright 2003. Statements expressed within this article should not be considered endorsements of products or procedures by the FICPA.

About the Author

Sydney S. Traum practices law as owner of Sydney S. Traum, P.A. in the Miami, Florida area. He is Board Certified by The Florida Bar in Taxation and also in Wills, Estates & Trusts. He is licensed as a CPA and an attorney in both New York and Florida. Mr. Traum is president of the Florida Association of Attorney-CPAs and past president of The American Association of Attorney-Certified Public Accountants, the Greater Miami Tax Institute, and the FICPA Dade County Chapter. He is author of The S Corporation, Planning and Operation, as well as The S Corporation Answer Book, both published by Panel Publishers, a Division of Aspen Publishers, Inc. Mr. Traum has lectured extensively on S Corporations and presented continuing education programs. He received a BBA degree from CCNY, a JD degree from Harvard Law School, and an LLM in Taxation degree from New York University Law School.

* Portions of this outline are adapted from Panel Publishers loose-leaf tax service entitled The S Corporation: Planning & Operation, written by Sydney S. Traum.

Copyright American Association of Attorney-Certified Public Accountants Nov 2003
Provided by ProQuest Information and Learning Company. All rights Reserved