§1366 — Pass-thru of items to shareholders
122 citing cases
Statute Text — 26 U.S.C. §1366
In determining the tax under this chapter of a shareholder for the shareholder’s taxable year in which the taxable year of the S corporation ends (or for the final taxable year of a shareholder who dies, or of a trust or estate which terminates, before the end of the corporation’s taxable year), there shall be taken into account the shareholder’s pro rata share of the corporation’s—
items of income (including tax-exempt income), loss, deduction, or credit the separate treatment of which could affect the liability for tax of any shareholder, and
nonseparately computed income or loss.
For purposes of the preceding sentence, the items referred to in subparagraph (A) shall include amounts described in paragraph (4) or (6) of section 702(a).
For purposes of this subchapter, the term “nonseparately computed income or loss” means gross income minus the deductions allowed to the corporation under this chapter, determined by excluding all items described in paragraph (1)(A).
The character of any item included in a shareholder’s pro rata share under paragraph (1) of subsection (a) shall be determined as if such item were realized directly from the source from which realized by the corporation, or incurred in the same manner as incurred by the corporation.
In any case where it is necessary to determine the gross income of a shareholder for purposes of this title, such gross income shall include the shareholder’s pro rata share of the gross income of the corporation.
The aggregate amount of losses and deductions taken into account by a shareholder under subsection (a) for any taxable year shall not exceed the sum of—
the adjusted basis of the shareholder’s stock in the S corporation (determined with regard to paragraphs (1) and (2)(A) of section 1367(a) for the taxable year), and
the shareholder’s adjusted basis of any indebtedness of the S corporation to the shareholder (determined without regard to any adjustment under paragraph (2) of section 1367(b) for the taxable year).
Except as provided in subparagraph (B), any loss or deduction which is disallowed for any taxable year by reason of paragraph (1) shall be treated as incurred by the corporation in the succeeding taxable year with respect to that shareholder.
In the case of any transfer described in section 1041(a) of stock of an S corporation, any loss or deduction described in subparagraph (A) with respect such stock shall be treated as incurred by the corporation in the succeeding taxable year with respect to the transferee.
If for the last taxable year of a corporation for which it was an S corporation a loss or deduction was disallowed by reason of paragraph (1), such loss or deduction shall be treated as incurred by the shareholder on the last day of any post-termination transition period.
The aggregate amount of losses and deductions taken into account by a shareholder under subparagraph (A) shall not exceed the adjusted basis of the shareholder’s stock in the corporation (determined at the close of the last day of the post-termination transition period and without regard to this paragraph).
The shareholder’s basis in the stock of the corporation shall be reduced by the amount allowed as a deduction by reason of this paragraph.
To the extent that any increase in adjusted basis described in subparagraph (B) would have increased the shareholder’s amount at risk under section 465 if such increase had occurred on the day preceding the commencement of the post-termination transition period, rules similar to the rules described in subparagraphs (A) through (C) shall apply to any losses disallowed by reason of section 465(a).
In the case of any charitable contribution of property to which the second sentence of section 1367(a)(2) applies, paragraph (1) shall not apply to the extent of the excess (if any) of—
the shareholder’s pro rata share of such contribution, over
the shareholder’s pro rata share of the adjusted basis of such property.
If an individual who is a member of the family (within the meaning of section 704(e)(2) of one or more shareholders of an S corporation renders services for the corporation or furnishes capital to the corporation without receiving reasonable compensation therefor, the Secretary shall make such adjustments in the items taken into account by such individual and such shareholders as may be necessary in order to reflect the value of such services or capital.
Subsection (a) shall not apply with respect to any credit allowable under section 34 (relating to certain uses of gasoline and special fuels).
If any tax is imposed under section 1374 for any taxable year on an S corporation, for purposes of subsection (a), the amount so imposed shall be treated as a loss sustained by the S corporation during such taxable year. The character of such loss shall be determined by allocating the loss proportionately among the recognized built-in gains giving rise to such tax.
If any tax is imposed under section 1375 for any taxable year on an S corporation, for purposes of subsection (a), each item of passive investment income shall be reduced by an amount which bears the same ratio to the amount of such tax as—
the amount of such item, bears to
the total passive investment income for the taxable year.
Treasury Regulations
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Treas. Reg. §1.1366-0Table of contents
The following table of contents is provided to facilitate the use of §§ 1.1366-1 through 1.1366-5:
(a) Determination of shareholder's tax liability.
(1) In general.
(2) Separately stated items of income, loss, deduction, or credit.
(3) Nonseparately computed income or loss.
(4) Separate activities requirement.
(5) Aggregation of deductions or exclusions for purposes of limitations.
(b) Character of items constituting pro rata share.
(1) In general.
(2) Exception for contribution of noncapital gain property.
(3) Exception for contribution of capital loss property.
(c) Gross income of a shareholder.
(1) In general.
(2) Gross income for substantial omission of items.
(d) Shareholders holding stock subject to community property laws.
(e) Net operating loss deduction of shareholder of S corporation.
(f) Cross-reference.
(a) In general.
(1) Limitation on losses and deductions.
(2) Basis of indebtedness.
(i) In general.
(ii) Special rule for guarantees.
(iii) Examples.
(3) Carryover of disallowance.
(4) Basis limitation amount.
(i) Stock portion.
(ii) Indebtedness portion.
(5) Limitation on losses and deductions allocated to each item.
(6) Nontransferability of losses and deductions.
(i) In general.
(ii) Exceptions for transfers of stock under section 1041(a).
(iii) Examples.
(7) Basis of stock acquired by gift.
(b) Special rules for carryover of disallowed losses and deductions to post-termination transition period described in section 1377(b).
(1) In general.
(2) Limitation on losses and deductions.
(3) Limitation on losses and deductions allocated to each item.
(4) Adjustment to the basis of stock.
(c) Carryover of disallowed losses and deductions in the case of liquidations, reorganizations, and divisions.
(1) Liquidations and reorganizations.
(2) Corporate separations to which section 368(a)(1)(D) applies.
(a) In general.
(b) Examples.
(a) Passthrough inapplicable to section 34 credit.
(b) Reduction in passthrough for tax imposed on built-in gains.
(c) Reduction in passthrough for tax imposed on excess net passive income.
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Treas. Reg. §1.1366-0(a)Passthrough inapplicable to section 34 credit.
Passthrough inapplicable to section 34 credit.
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Treas. Reg. §1.1366-0(b)Reduction in passthrough for tax imposed on built-in gains.
Reduction in passthrough for tax imposed on built-in gains.
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Treas. Reg. §1.1366-0(c)Reduction in passthrough for tax imposed on excess net passive income.
Reduction in passthrough for tax imposed on excess net passive income.
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Treas. Reg. §1.1366-0(d)Shareholders holding stock subject to community property laws.
Shareholders holding stock subject to community property laws.
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Treas. Reg. §1.1366-0(e)Net operating loss deduction of shareholder of S corporation.
Net operating loss deduction of shareholder of S corporation.
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Treas. Reg. §1.1366-0(f)Cross-reference.
Cross-reference.
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Treas. Reg. §1.1366-0(i)In general.
In general.
(ii) Exceptions for transfers of stock under section 1041(a).
(iii) Examples.
(7) Basis of stock acquired by gift.
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Treas. Reg. §1.1366-1Shareholder's share of items of an S corporation
(a) Determination of shareholder's tax liability—(1) In general. An S corporation must report, and a shareholder is required to take into account in the shareholder's return, the shareholder's pro rata share, whether or not distributed, of the S corporation's items of income, loss, deduction, or credit described in paragraphs (a)(2), (3), and (4) of this section. A shareholder's pro rata share is determined in accordance with the provisions of section 1377(a) and the regulations thereunder. The shareholder takes these items into account in determining the shareholder's taxable income and tax liability for the shareholder's taxable year with or within which the taxable year of the corporation ends. If the shareholder dies (or if the shareholder is an estate or trust and the estate or trust terminates) before the end of the taxable year of the corporation, the shareholder's pro rata share of these items is taken into account on the shareholder's final return. For the limitation on allowance of a shareholder's pro rata share of S corporation losses or deductions, see section 1366(d) and § 1.1366-2.
(2) Separately stated items of income, loss, deduction, or credit. Each shareholder must take into account separately the shareholder's pro rata share of any item of income (including tax-exempt income), loss, deduction, or credit of the S corporation that if separately taken into account by any shareholder could affect the shareholder's tax liability for that taxable year differently than if the shareholder did not take the item into account separately. The separately stated items of the S corporation include, but are not limited to, the following items—
(i) The corporation's combined net amount of gains and losses from sales or exchanges of capital assets grouped by applicable holding periods, by applicable rate of tax under section 1(h), and by any other classification that may be relevant in determining the shareholder's tax liability;
(ii) The corporation's combined net amount of gains and losses from sales or exchanges of property described in section 1231 (relating to property used in the trade or business and involuntary conversions), grouped by applicable holding periods, by applicable rate of tax under section 1(h), and by any other classification that may be relevant in determining the shareholder's tax liability;
(iii) Charitable contributions, grouped by the percentage limitations of section 170(b), paid by the corporation within the taxable year of the corporation;
(iv) The taxes described in section 901 that have been paid (or accrued) by the corporation to foreign countries or to possessions of the United States;
(v) Each of the corporation's separate items involved in the determination of credits against tax allowable under part IV of subchapter A (section 21 and following) of the Internal Revenue Code, except for any credit allowed under section 34 (relating to certain uses of gasoline and special fuels);
(vi) Each of the corporation's separate items of gains and losses from wagering transactions (section 165(d)); soil and water conservation expenditures (section 175); deduction under an election to expense certain depreciable business expenses (section 179); medical, dental, etc., expenses (section 213); the additional itemized deductions for individuals provided in part VII of subchapter B (section 212 and following) of the Internal Revenue Code; and any other itemized deductions for which the limitations on itemized deductions under sections 67 or 68 applies;
(vii) Any of the corporation's items of portfolio income or loss, and expenses related thereto, as defined in the regulations under section 469;
(viii) The corporation's tax-exempt income. For purposes of subchapter S, tax-exempt income is income that is permanently excludible from gross income in all circumstances in which the applicable provision of the Internal Revenue Code applies. For example, income that is excludible from gross income under section 101 (certain death benefits) or section 103 (interest on state and local bonds) is tax-exempt income, while income that is excludible from gross income under section 108 (income from discharge of indebtedness) or section 109 (improvements by lessee on lessor's property) is not tax-exempt income;
(ix) The corporation's adjustments described in sections 56 and 58, and items of tax preference described in section 57; and
(x) Any item identified in guidance (including forms and instructions) issued by the Commissioner as an item required to be separately stated under this paragraph (a)(2).
(3) Nonseparately computed income or loss. Each shareholder must take into account separately the shareholder's pro rata share of the nonseparately computed income or loss of the S corporation. For this purpose, nonseparately computed income or loss means the corporation's gross income less the deductions allowed to the corporation under chapter 1 of the Internal Revenue Code, determined by excluding any item requiring separate computation under paragraph (a)(2) of this section.
(4) Separate activities requirement. An S corporation must report, and each shareholder must take into account in the shareholder's return, the shareholder's pro rata share of an S corporation's items of income, loss, deduction, or credit described in paragraphs (a)(2) and (3) of this section for each of the corporation's activities as defined in section 469 and the regulations thereunder.
(5) Aggregation of deductions or exclusions for purposes of limitations—(i) In general. A shareholder aggregates the shareholder's separate deductions or exclusions with the shareholder's pro rata share of the S corporation's separately stated deductions or exclusions in determining the amount of any deduction or exclusion allowable to the shareholder under subtitle A of the Internal Revenue Code as to which a limitation is imposed.
(ii) Example. The provisions of paragraph (a)(5)(i) of this section are illustrated by the following example:
(b) Character of items constituting pro rata share—(1) In general. Except as provided in paragraph (b)(2) or (3) of this section, the character of any item of income, loss, deduction, or credit described in section 1366(a)(1)(A) or (B) and paragraph (a) of this section is determined for the S corporation and retains that character in the hands of the shareholder. For example, if an S corporation has capital gain on the sale or exchange of a capital asset, a shareholder's pro rata share of that gain will also be characterized as a capital gain regardless of whether the shareholder is otherwise a dealer in that type of property. Similarly, if an S corporation engages in an activity that is not for profit (as defined in section 183), a shareholder's pro rata share of the S corporation's deductions will be characterized as not for profit. Also, if an S corporation makes a charitable contribution to an organization qualifying under section 170(b)(1)(A), a shareholder's pro rata share of the S corporation's charitable contribution will be characterized as made to an organization qualifying under section 170(b)(1)(A).
(2) Exception for contribution of noncapital gain property. If an S corporation is formed or availed of by any shareholder or group of shareholders for a principal purpose of selling or exchanging contributed property that in the hands of the shareholder or shareholders would not have produced capital gain if sold or exchanged by the shareholder or shareholders, then the gain on the sale or exchange of the property recognized by the corporation is not treated as a capital gain.
(3) Exception for contribution of capital loss property. If an S corporation is formed or availed of by any shareholder or group of shareholders for a principal purpose of selling or exchanging contributed property that in the hands of the shareholder or shareholders would have produced capital loss if sold or exchanged by the shareholder or shareholders, then the loss on the sale or exchange of the property recognized by the corporation is treated as a capital loss to the extent that, immediately before the contribution, the adjusted basis of the property in the hands of the shareholder or shareholders exceeded the fair market value of the property.
(c) Gross income of a shareholder—(1) In general. Where it is necessary to determine the amount or character of the gross income of a shareholder, the shareholder's gross income includes the shareholder's pro rata share of the gross income of the S corporation. The shareholder's pro rata share of the gross income of the S corporation is the amount of gross income of the corporation used in deriving the shareholder's pro rata share of S corporation taxable income or loss (including items described in section 1366(a)(1)(A) or (B) and paragraph (a) of this section). For example, a shareholder is required to include the shareholder's pro rata share of S corporation gross income in computing the shareholder's gross income for the purposes of determining the necessity of filing a return (section 6012(a)) and the shareholder's gross income derived from farming (sections 175 and 6654(i)).
(2) Gross income for substantial omission of items—(i) In general. For purposes of determining the applicability of the 6-year period of limitation on assessment and collection provided in section 6501(e) (relating to omission of more than 25 percent of gross income), a shareholder's gross income includes the shareholder's pro rata share of S corporation gross income (as described in section 6501(e)(1)(A)(i)). In this respect, the amount of S corporation gross income used in deriving the shareholder's pro rata share of any item of S corporation income, loss, deduction, or credit (as included or disclosed in the shareholder's return) is considered as an amount of gross income stated in the shareholder's return for purposes of section 6501(e).
(ii) Example. The following example illustrates the provisions of paragraph (c)(2)(i) of this section:
(d) Shareholders holding stock subject to community property laws. If a shareholder holds S corporation stock that is community property, then the shareholder's pro rata share of any item or items listed in paragraphs (a)(2), (3), and (4) of this section with respect to that stock is reported by the husband and wife in accordance with community property rules.
(e) Net operating loss deduction of shareholder of S corporation. For purposes of determining a net operating loss deduction under section 172, a shareholder of an S corporation must take into account the shareholder's pro rata share of items of income, loss, deduction, or credit of the corporation. See section 1366(b) and paragraph (b) of this section for rules on determining the character of the items. In determining under section 172(d)(4) the nonbusiness deductions allowable to a shareholder of an S corporation (arising from both corporation sources and any other sources), the shareholder separately takes into account the shareholder's pro rata share of the deductions of the corporation that are not attributable to a trade or business and combines this amount with the shareholder's nonbusiness deductions from any other sources. The shareholder also separately takes into account the shareholder's pro rata share of the gross income of the corporation not derived from a trade or business and combines this amount with the shareholder's nonbusiness income from all other sources. See section 172 and the regulations thereunder.
(f) Cross-reference. For rules relating to the consistent tax treatment of subchapter S items, see section 6037(c).
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Treas. Reg. §1.1366-1(a)Determination of shareholder's tax liability—(1) In general.
Determination of shareholder's tax liability—(1) In general. An S corporation must report, and a shareholder is required to take into account in the shareholder's return, the shareholder's pro rata share, whether or not distributed, of the S corporation's items of income, loss, deduction, or credit described in paragraphs (a)(2), (3), and (4) of this section. A shareholder's pro rata share is determined in accordance with the provisions of section 1377(a) and the regulations thereunder. The shareholder takes these items into account in determining the shareholder's taxable income and tax liability for the shareholder's taxable year with or within which the taxable year of the corporation ends. If the shareholder dies (or if the shareholder is an estate or trust and the estate or trust terminates) before the end of the taxable year of the corporation, the shareholder's pro rata share of these items is taken into account on the shareholder's final return. For the limitation on allowance of a shareholder's pro rata share of S corporation losses or deductions, see section 1366(d) and § 1.1366-2.
(2) Separately stated items of income, loss, deduction, or credit. Each shareholder must take into account separately the shareholder's pro rata share of any item of income (including tax-exempt income), loss, deduction, or credit of the S corporation that if separately taken into account by any shareholder could affect the shareholder's tax liability for that taxable year differently than if the shareholder did not take the item into account separately. The separately stated items of the S corporation include, but are not limited to, the following items—
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Treas. Reg. §1.1366-1(b)Character of items constituting pro rata share—(1) In general.
Character of items constituting pro rata share—(1) In general. Except as provided in paragraph (b)(2) or (3) of this section, the character of any item of income, loss, deduction, or credit described in section 1366(a)(1)(A) or (B) and paragraph (a) of this section is determined for the S corporation and retains that character in the hands of the shareholder. For example, if an S corporation has capital gain on the sale or exchange of a capital asset, a shareholder's pro rata share of that gain will also be characterized as a capital gain regardless of whether the shareholder is otherwise a dealer in that type of property. Similarly, if an S corporation engages in an activity that is not for profit (as defined in section 183), a shareholder's pro rata share of the S corporation's deductions will be characterized as not for profit. Also, if an S corporation makes a charitable contribution to an organization qualifying under section 170(b)(1)(A), a shareholder's pro rata share of the S corporation's charitable contribution will be characterized as made to an organization qualifying under section 170(b)(1)(A).
(2) Exception for contribution of noncapital gain property. If an S corporation is formed or availed of by any shareholder or group of shareholders for a principal purpose of selling or exchanging contributed property that in the hands of the shareholder or shareholders would not have produced capital gain if sold or exchanged by the shareholder or shareholders, then the gain on the sale or exchange of the property recognized by the corporation is not treated as a capital gain.
(3) Exception for contribution of capital loss property. If an S corporation is formed or availed of by any shareholder or group of shareholders for a principal purpose of selling or exchanging contributed property that in the hands of the shareholder or shareholders would have produced capital loss if sold or exchanged by the shareholder or shareholders, then the loss on the sale or exchange of the property recognized by the corporation is treated as a capital loss to the extent that, immediately before the contribution, the adjusted basis of the property in the hands of the shareholder or shareholders exceeded the fair market value of the property.
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Treas. Reg. §1.1366-1(c)Gross income of a shareholder—(1) In general.
Gross income of a shareholder—(1) In general. Where it is necessary to determine the amount or character of the gross income of a shareholder, the shareholder's gross income includes the shareholder's pro rata share of the gross income of the S corporation. The shareholder's pro rata share of the gross income of the S corporation is the amount of gross income of the corporation used in deriving the shareholder's pro rata share of S corporation taxable income or loss (including items described in section 1366(a)(1)(A) or (B) and paragraph (a) of this section). For example, a shareholder is required to include the shareholder's pro rata share of S corporation gross income in computing the shareholder's gross income for the purposes of determining the necessity of filing a return (section 6012(a)) and the shareholder's gross income derived from farming (sections 175 and 6654(i)).
(2) Gross income for substantial omission of items—(i) In general. For purposes of determining the applicability of the 6-year period of limitation on assessment and collection provided in section 6501(e) (relating to omission of more than 25 percent of gross income), a shareholder's gross income includes the shareholder's pro rata share of S corporation gross income (as described in section 6501(e)(1)(A)(i)). In this respect, the amount of S corporation gross income used in deriving the shareholder's pro rata share of any item of S corporation income, loss, deduction, or credit (as included or disclosed in the shareholder's return) is considered as an amount of gross income stated in the shareholder's return for purposes of section 6501(e).
(ii) Example. The following example illustrates the provisions of paragraph (c)(2)(i) of this section:
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Treas. Reg. §1.1366-1(d)Shareholders holding stock subject to community property laws.
Shareholders holding stock subject to community property laws. If a shareholder holds S corporation stock that is community property, then the shareholder's pro rata share of any item or items listed in paragraphs (a)(2), (3), and (4) of this section with respect to that stock is reported by the husband and wife in accordance with community property rules.
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Treas. Reg. §1.1366-1(e)Net operating loss deduction of shareholder of S corporation.
Net operating loss deduction of shareholder of S corporation. For purposes of determining a net operating loss deduction under section 172, a shareholder of an S corporation must take into account the shareholder's pro rata share of items of income, loss, deduction, or credit of the corporation. See section 1366(b) and paragraph (b) of this section for rules on determining the character of the items. In determining under section 172(d)(4) the nonbusiness deductions allowable to a shareholder of an S corporation (arising from both corporation sources and any other sources), the shareholder separately takes into account the shareholder's pro rata share of the deductions of the corporation that are not attributable to a trade or business and combines this amount with the shareholder's nonbusiness deductions from any other sources. The shareholder also separately takes into account the shareholder's pro rata share of the gross income of the corporation not derived from a trade or business and combines this amount with the shareholder's nonbusiness income from all other sources. See section 172 and the regulations thereunder.
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Treas. Reg. §1.1366-1(f)Cross-reference.
Cross-reference. For rules relating to the consistent tax treatment of subchapter S items, see section 6037(c).
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Treas. Reg. §1.1366-1(i)§1.1366-1(i)
The corporation's combined net amount of gains and losses from sales or exchanges of capital assets grouped by applicable holding periods, by applicable rate of tax under section 1(h), and by any other classification that may be relevant in determining the shareholder's tax liability;
(ii) The corporation's combined net amount of gains and losses from sales or exchanges of property described in section 1231 (relating to property used in the trade or business and involuntary conversions), grouped by applicable holding periods, by applicable rate of tax under section 1(h), and by any other classification that may be relevant in determining the shareholder's tax liability;
(iii) Charitable contributions, grouped by the percentage limitations of section 170(b), paid by the corporation within the taxable year of the corporation;
(iv) The taxes described in section 901 that have been paid (or accrued) by the corporation to foreign countries or to possessions of the United States;
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Treas. Reg. §1.1366-1(v)§1.1366-1(v)
Each of the corporation's separate items involved in the determination of credits against tax allowable under part IV of subchapter A (section 21 and following) of the Internal Revenue Code, except for any credit allowed under section 34 (relating to certain uses of gasoline and special fuels);
(vi) Each of the corporation's separate items of gains and losses from wagering transactions (section 165(d)); soil and water conservation expenditures (section 175); deduction under an election to expense certain depreciable business expenses (section 179); medical, dental, etc., expenses (section 213); the additional itemized deductions for individuals provided in part VII of subchapter B (section 212 and following) of the Internal Revenue Code; and any other itemized deductions for which the limitations on itemized deductions under sections 67 or 68 applies;
(vii) Any of the corporation's items of portfolio income or loss, and expenses related thereto, as defined in the regulations under section 469;
(viii) The corporation's tax-exempt income. For purposes of subchapter S, tax-exempt income is income that is permanently excludible from gross income in all circumstances in which the applicable provision of the Internal Revenue Code applies. For example, income that is excludible from gross income under section 101 (certain death benefits) or section 103 (interest on state and local bonds) is tax-exempt income, while income that is excludible from gross income under section 108 (income from discharge of indebtedness) or section 109 (improvements by lessee on lessor's property) is not tax-exempt income;
(ix) The corporation's adjustments described in sections 56 and 58, and items of tax preference described in section 57; and
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Treas. Reg. §1.1366-1(x)Any item identified in guidance (including forms and instructions) issued by the Commissioner as an item required to be separately stated under this paragraph (a)(2).
Any item identified in guidance (including forms and instructions) issued by the Commissioner as an item required to be separately stated under this paragraph (a)(2).
(3) Nonseparately computed income or loss. Each shareholder must take into account separately the shareholder's pro rata share of the nonseparately computed income or loss of the S corporation. For this purpose, nonseparately computed income or loss means the corporation's gross income less the deductions allowed to the corporation under chapter 1 of the Internal Revenue Code, determined by excluding any item requiring separate computation under paragraph (a)(2) of this section.
(4) Separate activities requirement. An S corporation must report, and each shareholder must take into account in the shareholder's return, the shareholder's pro rata share of an S corporation's items of income, loss, deduction, or credit described in paragraphs (a)(2) and (3) of this section for each of the corporation's activities as defined in section 469 and the regulations thereunder.
(5) Aggregation of deductions or exclusions for purposes of limitations—(i) In general. A shareholder aggregates the shareholder's separate deductions or exclusions with the shareholder's pro rata share of the S corporation's separately stated deductions or exclusions in determining the amount of any deduction or exclusion allowable to the shareholder under subtitle A of the Internal Revenue Code as to which a limitation is imposed.
(ii) Example. The provisions of paragraph (a)(5)(i) of this section are illustrated by the following example:
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Treas. Reg. §1.1366-2Limitations on deduction of passthrough items of an S corporation to its shareholders
(a) In general—(1) Limitation on losses and deductions. The aggregate amount of losses and deductions taken into account by a shareholder under § 1.1366-1(a) (2), (3), and (4) for any taxable year of an S corporation cannot exceed the sum of—
(i) The adjusted basis of the shareholder's stock in the corporation (as determined under paragraph (a)(4)(i) of this section); and
(ii) The adjusted basis of any indebtedness of the corporation to the shareholder (as determined under paragraphs (a)(2) and (a)(4)(ii) of this section).
(2) Basis of indebtedness—(i) In general. The term basis of any indebtedness of the S corporation to the shareholder means the shareholder's adjusted basis (as defined in § 1.1011-1 and as specifically provided in section 1367(b)(2)) in any bona fide indebtedness of the S corporation that runs directly to the shareholder. Whether indebtedness is bona fide indebtedness to a shareholder is determined under general Federal tax principles and depends upon all of the facts and circumstances.
(ii) Special rule for guarantees. A shareholder does not obtain basis of indebtedness in the S corporation merely by guaranteeing a loan or acting as a surety, accommodation party, or in any similar capacity relating to a loan. When a shareholder makes a payment on bona fide indebtedness of the S corporation for which the shareholder has acted as guarantor or in a similar capacity, then the shareholder may increase the shareholder's basis of indebtedness to the extent of that payment.
(iii) Examples. The following examples illustrate the provisions of paragraph (a)(2)(i) and (ii) of this section:
(3) Carryover of disallowance. A shareholder's aggregate amount of losses and deductions for a taxable year in excess of the sum of the adjusted basis of the shareholder's stock in an S corporation and of any indebtedness of the S corporation to the shareholder is not allowed for the taxable year. However, any disallowed loss or deduction retains its character and is treated as incurred by the corporation in the corporation's first succeeding taxable year, and subsequent taxable years, with respect to the shareholder. For rules on determining the adjusted bases of stock of an S corporation and indebtedness of the corporation to the shareholder, see paragraphs (a)(4) (i) and (ii) of this section.
(4) Basis limitation amount—(i) Stock portion. A shareholder generally determines the adjusted basis of stock for purposes of paragraphs (a)(1)(i) and (3) of this section (limiting losses and deductions) by taking into account only increases in basis under section 1367(a)(1) for the taxable year and decreases in basis under section 1367(a)(2) (A), (D) and (E) (relating to distributions, noncapital, nondeductible expenses, and certain oil and gas depletion deductions) for the taxable year. In so determining this loss limitation amount, the shareholder disregards decreases in basis under section 1367(a)(2) (B) and (C) (for losses and deductions, including losses and deductions previously disallowed) for the taxable year. However, if the shareholder has in effect for the taxable year an election under § 1.1367-1(g) to decrease basis by items of loss and deduction prior to decreasing basis by noncapital, nondeductible expenses and certain oil and gas depletion deductions, the shareholder also disregards decreases in basis under section 1367(a)(2) (D) and (E). This basis limitation amount for stock is determined at the time prescribed under § 1.1367-1(d)(1) for adjustments to the basis of stock.
(ii) Indebtedness portion. A shareholder determines the shareholder's adjusted basis in indebtedness of the corporation for purposes of paragraphs (a)(1)(ii) and (3) of this section (limiting losses and deductions) without regard to any adjustment under section 1367(b)(2)(A) for the taxable year. This basis limitation amount for indebtedness is determined at the time prescribed under § 1.1367-2(d)(1) for adjustments to the basis of indebtedness.
(5) Limitation on losses and deductions allocated to each item. If a shareholder's pro rata share of the aggregate amount of losses and deductions specified in § 1.1366-1(a)(2), (3), and (4) exceeds the sum of the adjusted basis of the shareholder's stock in the corporation (determined in accordance with paragraph (a)(4)(i) of this section) and the adjusted basis of any indebtedness of the corporation to the shareholder (determined in accordance with paragraph (a)(4)(ii) of this section), then the limitation on losses and deductions under section 1366(d)(1) must be allocated among the shareholder's pro rata share of each loss or deduction. The amount of the limitation allocated to any loss or deduction is an amount that bears the same ratio to the amount of the limitation as the loss or deduction bears to the total of the losses and deductions. For this purpose, the total of losses and deductions for the taxable year is the sum of the shareholder's pro rata share of losses and deductions for the taxable year, and the losses and deductions disallowed and carried forward from prior years pursuant to section 1366(d)(2).
(6) Nontransferability of losses and deductions—(i) In general. Except as provided in paragraph (a)(6)(ii) of this section, any loss or deduction disallowed under paragraph (a)(1) of this section is personal to the shareholder and cannot in any manner be transferred to another person. If a shareholder transfers some but not all of the shareholder's stock in the corporation, the amount of any disallowed loss or deduction under this section is not reduced and the transferee does not acquire any portion of the disallowed loss or deduction. If a shareholder transfers all of the shareholder's stock in the corporation, any disallowed loss or deduction is permanently disallowed.
(ii) Exceptions for transfers of stock under section 1041(a). If a shareholder transfers stock of an S corporation after December 31, 2004, in a transfer described in section 1041(a), any loss or deduction with respect to the transferred stock that is disallowed to the transferring shareholder under paragraph (a)(1) of this section shall be treated as incurred by the corporation in the following taxable year with respect to the transferee spouse or former spouse. The amount of any loss or deduction with respect to the stock transferred shall be determined by prorating any losses or deductions disallowed under paragraph (a)(1) of this section for the year of the transfer between the transferor and the spouse or former spouse based on the stock ownership at the beginning of the following taxable year. If a transferor claims a deduction for losses in the taxable year of transfer, then under paragraph (a)(5) of this section, if the transferor's pro rata share of the losses and deductions in the year of transfer exceeds the transferor's basis in stock and the indebtedness of the corporation to the transferor, then the limitation must be allocated among the transferor spouse's pro rata share of each loss or deduction, including disallowed losses and deductions carried over from the prior year.
(iii) Examples. The following examples illustrates the provisions of paragraph (a)(6)(ii) of this section:
(7) Basis of stock acquired by gift. For purposes of section 1366(d)(1)(A) and paragraphs (a)(1)(i) and (3) of this section, the basis of stock in a corporation acquired by gift is the basis of the stock that is used for purposes of determining loss under section 1015(a).
(b) Special rules for carryover of disallowed losses and deductions to post-termination transition period described in section 1377(b)—(1) In general. If, for the last taxable year of a corporation for which it was an S corporation, a loss or deduction was disallowed to a shareholder by reason of the limitation in paragraph (a) of this section, the loss or deduction is treated under section 1366(d)(3) as incurred by that shareholder on the last day of any post-termination transition period (within the meaning of section 1377(b)).
(2) Limitation on losses and deductions. The aggregate amount of losses and deductions taken into account by a shareholder under paragraph (b)(1) of this section cannot exceed the adjusted basis of the shareholder's stock in the corporation determined at the close of the last day of the post-termination transition period. For this purpose, the adjusted basis of a shareholder's stock in the corporation is determined at the close of the last day of the post-termination transition period without regard to any reduction required under paragraph (b)(4) of this section. If a shareholder disposes of a share of stock prior to the close of the last day of the post-termination transition period, the adjusted basis of that share is its basis as of the close of the day of disposition. Any losses and deductions in excess of a shareholder's adjusted stock basis are permanently disallowed. For purposes of section 1366(d)(3)(B) and this paragraph (b)(2), the basis of stock in a corporation acquired by gift is the basis of the stock that is used for purposes of determining loss under section 1015(a).
(3) Limitation on losses and deductions allocated to each item. If the aggregate amount of losses and deductions treated as incurred by the shareholder under paragraph (b)(1) of this section exceeds the adjusted basis of the shareholder's stock determined under paragraph (b)(2) of this section, the limitation on losses and deductions under section 1366(d)(3)(B) must be allocated among each loss or deduction. The amount of the limitation allocated to each loss or deduction is an amount that bears the same ratio to the amount of the limitation as the amount of each loss or deduction bears to the total of all the losses and deductions.
(4) Adjustment to the basis of stock. The shareholder's basis in the stock of the corporation is reduced by the amount allowed as a deduction by reason of this paragraph (b). For rules regarding adjustments to the basis of a shareholder's stock in an S corporation, see § 1.1367-1.
(c) Carryover of disallowed losses and deductions in the case of liquidations, reorganizations, and divisions—(1) Liquidations and reorganizations. If a corporation acquires the assets of an S corporation in a transaction to which section 381(a) applies, any loss or deduction disallowed under paragraph (a) of this section with respect to a shareholder of the distributor or transferor S corporation is available to that shareholder as a shareholder of the acquiring corporation. Thus, where the acquiring corporation is an S corporation, a loss or deduction of a shareholder of the distributor or transferor S corporation disallowed prior to or during the taxable year of the transaction is treated as incurred by the acquiring S corporation with respect to that shareholder if the shareholder is a shareholder of the acquiring S corporation after the transaction. Where the acquiring corporation is a C corporation, a post-termination transition period arises the day after the last day that an S corporation was in existence and the rules provided in paragraph (b) of this section apply with respect to any shareholder of the acquired S corporation that is also a shareholder of the acquiring C corporation after the transaction. See the special rules under section 1377 for the availability of the post-termination transition period if the acquiring corporation is a C corporation.
(2) Corporate separations to which section 368(a)(1)(D) applies. If an S corporation transfers a portion of its assets constituting an active trade or business to another corporation in a transaction to which section 368(a)(1)(D) applies, and immediately thereafter the stock and securities of the controlled corporation are distributed in a distribution or exchange to which section 355 (or so much of section 356 as relates to section 355) applies, any loss or deduction disallowed under paragraph (a) of this section with respect to a shareholder of the distributing S corporation immediately before the transaction is allocated between the distributing corporation and the controlled corporation with respect to the shareholder. Such allocation shall be made according to any reasonable method, including a method based on the relative fair market value of the shareholder's stock in the distributing and controlled corporations immediately after the distribution, a method based on the relative adjusted basis of the assets in the distributing and controlled corporations immediately after the distribution, or, in the case of losses and deductions clearly attributable to either the distributing or controlled corporation, any method that allocates such losses and deductions accordingly.
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Treas. Reg. §1.1366-2(a)In general—(1) Limitation on losses and deductions.
In general—(1) Limitation on losses and deductions. The aggregate amount of losses and deductions taken into account by a shareholder under § 1.1366-1(a) (2), (3), and (4) for any taxable year of an S corporation cannot exceed the sum of—
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Treas. Reg. §1.1366-2(b)Special rules for carryover of disallowed losses and deductions to post-termination transition period described in section 1377(b)—(1) In general.
Special rules for carryover of disallowed losses and deductions to post-termination transition period described in section 1377(b)—(1) In general. If, for the last taxable year of a corporation for which it was an S corporation, a loss or deduction was disallowed to a shareholder by reason of the limitation in paragraph (a) of this section, the loss or deduction is treated under section 1366(d)(3) as incurred by that shareholder on the last day of any post-termination transition period (within the meaning of section 1377(b)).
(2) Limitation on losses and deductions. The aggregate amount of losses and deductions taken into account by a shareholder under paragraph (b)(1) of this section cannot exceed the adjusted basis of the shareholder's stock in the corporation determined at the close of the last day of the post-termination transition period. For this purpose, the adjusted basis of a shareholder's stock in the corporation is determined at the close of the last day of the post-termination transition period without regard to any reduction required under paragraph (b)(4) of this section. If a shareholder disposes of a share of stock prior to the close of the last day of the post-termination transition period, the adjusted basis of that share is its basis as of the close of the day of disposition. Any losses and deductions in excess of a shareholder's adjusted stock basis are permanently disallowed. For purposes of section 1366(d)(3)(B) and this paragraph (b)(2), the basis of stock in a corporation acquired by gift is the basis of the stock that is used for purposes of determining loss under section 1015(a).
(3) Limitation on losses and deductions allocated to each item. If the aggregate amount of losses and deductions treated as incurred by the shareholder under paragraph (b)(1) of this section exceeds the adjusted basis of the shareholder's stock determined under paragraph (b)(2) of this section, the limitation on losses and deductions under section 1366(d)(3)(B) must be allocated among each loss or deduction. The amount of the limitation allocated to each loss or deduction is an amount that bears the same ratio to the amount of the limitation as the amount of each loss or deduction bears to the total of all the losses and deductions.
(4) Adjustment to the basis of stock. The shareholder's basis in the stock of the corporation is reduced by the amount allowed as a deduction by reason of this paragraph (b). For rules regarding adjustments to the basis of a shareholder's stock in an S corporation, see § 1.1367-1.
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Treas. Reg. §1.1366-2(c)Carryover of disallowed losses and deductions in the case of liquidations, reorganizations, and divisions—(1) Liquidations and reorganizations.
Carryover of disallowed losses and deductions in the case of liquidations, reorganizations, and divisions—(1) Liquidations and reorganizations. If a corporation acquires the assets of an S corporation in a transaction to which section 381(a) applies, any loss or deduction disallowed under paragraph (a) of this section with respect to a shareholder of the distributor or transferor S corporation is available to that shareholder as a shareholder of the acquiring corporation. Thus, where the acquiring corporation is an S corporation, a loss or deduction of a shareholder of the distributor or transferor S corporation disallowed prior to or during the taxable year of the transaction is treated as incurred by the acquiring S corporation with respect to that shareholder if the shareholder is a shareholder of the acquiring S corporation after the transaction. Where the acquiring corporation is a C corporation, a post-termination transition period arises the day after the last day that an S corporation was in existence and the rules provided in paragraph (b) of this section apply with respect to any shareholder of the acquired S corporation that is also a shareholder of the acquiring C corporation after the transaction. See the special rules under section 1377 for the availability of the post-termination transition period if the acquiring corporation is a C corporation.
(2) Corporate separations to which section 368(a)(1)(D) applies. If an S corporation transfers a portion of its assets constituting an active trade or business to another corporation in a transaction to which section 368(a)(1)(D) applies, and immediately thereafter the stock and securities of the controlled corporation are distributed in a distribution or exchange to which section 355 (or so much of section 356 as relates to section 355) applies, any loss or deduction disallowed under paragraph (a) of this section with respect to a shareholder of the distributing S corporation immediately before the transaction is allocated between the distributing corporation and the controlled corporation with respect to the shareholder. Such allocation shall be made according to any reasonable method, including a method based on the relative fair market value of the shareholder's stock in the distributing and controlled corporations immediately after the distribution, a method based on the relative adjusted basis of the assets in the distributing and controlled corporations immediately after the distribution, or, in the case of losses and deductions clearly attributable to either the distributing or controlled corporation, any method that allocates such losses and deductions accordingly.
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Treas. Reg. §1.1366-2(i)§1.1366-2(i)
The adjusted basis of the shareholder's stock in the corporation (as determined under paragraph (a)(4)(i) of this section); and
(ii) The adjusted basis of any indebtedness of the corporation to the shareholder (as determined under paragraphs (a)(2) and (a)(4)(ii) of this section).
(2) Basis of indebtedness—(i) In general. The term basis of any indebtedness of the S corporation to the shareholder means the shareholder's adjusted basis (as defined in § 1.1011-1 and as specifically provided in section 1367(b)(2)) in any bona fide indebtedness of the S corporation that runs directly to the shareholder. Whether indebtedness is bona fide indebtedness to a shareholder is determined under general Federal tax principles and depends upon all of the facts and circumstances.
(ii) Special rule for guarantees. A shareholder does not obtain basis of indebtedness in the S corporation merely by guaranteeing a loan or acting as a surety, accommodation party, or in any similar capacity relating to a loan. When a shareholder makes a payment on bona fide indebtedness of the S corporation for which the shareholder has acted as guarantor or in a similar capacity, then the shareholder may increase the shareholder's basis of indebtedness to the extent of that payment.
(iii) Examples. The following examples illustrate the provisions of paragraph (a)(2)(i) and (ii) of this section:
(3) Carryover of disallowance. A shareholder's aggregate amount of losses and deductions for a taxable year in excess of the sum of the adjusted basis of the shareholder's stock in an S corporation and of any indebtedness of the S corporation to the shareholder is not allowed for the taxable year. However, any disallowed loss or deduction retains its character and is treated as incurred by the corporation in the corporation's first succeeding taxable year, and subsequent taxable years, with respect to the shareholder. For rules on determining the adjusted bases of stock of an S corporation and indebtedness of the corporation to the shareholder, see paragraphs (a)(4) (i) and (ii) of this section.
(4) Basis limitation amount—(i) Stock portion. A shareholder generally determines the adjusted basis of stock for purposes of paragraphs (a)(1)(i) and (3) of this section (limiting losses and deductions) by taking into account only increases in basis under section 1367(a)(1) for the taxable year and decreases in basis under section 1367(a)(2) (A), (D) and (E) (relating to distributions, noncapital, nondeductible expenses, and certain oil and gas depletion deductions) for the taxable year. In so determining this loss limitation amount, the shareholder disregards decreases in basis under section 1367(a)(2) (B) and (C) (for losses and deductions, including losses and deductions previously disallowed) for the taxable year. However, if the shareholder has in effect for the taxable year an election under § 1.1367-1(g) to decrease basis by items of loss and deduction prior to decreasing basis by noncapital, nondeductible expenses and certain oil and gas depletion deductions, the shareholder also disregards decreases in basis under section 1367(a)(2) (D) and (E). This basis limitation amount for stock is determined at the time prescribed under § 1.1367-1(d)(1) for adjustments to the basis of stock.
(ii) Indebtedness portion. A shareholder determines the shareholder's adjusted basis in indebtedness of the corporation for purposes of paragraphs (a)(1)(ii) and (3) of this section (limiting losses and deductions) without regard to any adjustment under section 1367(b)(2)(A) for the taxable year. This basis limitation amount for indebtedness is determined at the time prescribed under § 1.1367-2(d)(1) for adjustments to the basis of indebtedness.
(5) Limitation on losses and deductions allocated to each item. If a shareholder's pro rata share of the aggregate amount of losses and deductions specified in § 1.1366-1(a)(2), (3), and (4) exceeds the sum of the adjusted basis of the shareholder's stock in the corporation (determined in accordance with paragraph (a)(4)(i) of this section) and the adjusted basis of any indebtedness of the corporation to the shareholder (determined in accordance with paragraph (a)(4)(ii) of this section), then the limitation on losses and deductions under section 1366(d)(1) must be allocated among the shareholder's pro rata share of each loss or deduction. The amount of the limitation allocated to any loss or deduction is an amount that bears the same ratio to the amount of the limitation as the loss or deduction bears to the total of the losses and deductions. For this purpose, the total of losses and deductions for the taxable year is the sum of the shareholder's pro rata share of losses and deductions for the taxable year, and the losses and deductions disallowed and carried forward from prior years pursuant to section 1366(d)(2).
(6) Nontransferability of losses and deductions—(i) In general. Except as provided in paragraph (a)(6)(ii) of this section, any loss or deduction disallowed under paragraph (a)(1) of this section is personal to the shareholder and cannot in any manner be transferred to another person. If a shareholder transfers some but not all of the shareholder's stock in the corporation, the amount of any disallowed loss or deduction under this section is not reduced and the transferee does not acquire any portion of the disallowed loss or deduction. If a shareholder transfers all of the shareholder's stock in the corporation, any disallowed loss or deduction is permanently disallowed.
(ii) Exceptions for transfers of stock under section 1041(a). If a shareholder transfers stock of an S corporation after December 31, 2004, in a transfer described in section 1041(a), any loss or deduction with respect to the transferred stock that is disallowed to the transferring shareholder under paragraph (a)(1) of this section shall be treated as incurred by the corporation in the following taxable year with respect to the transferee spouse or former spouse. The amount of any loss or deduction with respect to the stock transferred shall be determined by prorating any losses or deductions disallowed under paragraph (a)(1) of this section for the year of the transfer between the transferor and the spouse or former spouse based on the stock ownership at the beginning of the following taxable year. If a transferor claims a deduction for losses in the taxable year of transfer, then under paragraph (a)(5) of this section, if the transferor's pro rata share of the losses and deductions in the year of transfer exceeds the transferor's basis in stock and the indebtedness of the corporation to the transferor, then the limitation must be allocated among the transferor spouse's pro rata share of each loss or deduction, including disallowed losses and deductions carried over from the prior year.
(iii) Examples. The following examples illustrates the provisions of paragraph (a)(6)(ii) of this section:
(7) Basis of stock acquired by gift. For purposes of section 1366(d)(1)(A) and paragraphs (a)(1)(i) and (3) of this section, the basis of stock in a corporation acquired by gift is the basis of the stock that is used for purposes of determining loss under section 1015(a).
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Treas. Reg. §1.1366-3Treatment of family groups
(a) In general. Under section 1366(e), if an individual, who is a member of the family of one or more shareholders of an S corporation, renders services for, or furnishes capital to, the corporation without receiving reasonable compensation, the Commissioner shall prescribe adjustments to those items taken into account by the individual and the shareholders as may be necessary to reflect the value of the services rendered or capital furnished. For these purposes, in determining the reasonable value for services rendered, or capital furnished, to the corporation, consideration will be given to all the facts and circumstances, including the amount that ordinarily would be paid in order to obtain comparable services or capital from a person (other than a member of the family) who is not a shareholder in the corporation. In addition, for purposes of section 1366(e), if a member of the family of one or more shareholders of the S corporation holds an interest in a passthrough entity (e.g., a partnership, S corporation, trust, or estate), that performs services for, or furnishes capital to, the S corporation without receiving reasonable compensation, the Commissioner shall prescribe adjustments to the passthrough entity and the corporation as may be necessary to reflect the value of the services rendered or capital furnished. For purposes of section 1366(e), the term family of any shareholder includes only the shareholder's spouse, ancestors, lineal descendants, and any trust for the primary benefit of any of these persons.
(b) Examples. The provisions of this section may be illustrated by the following examples:
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Treas. Reg. §1.1366-3(a)In general.
In general. Under section 1366(e), if an individual, who is a member of the family of one or more shareholders of an S corporation, renders services for, or furnishes capital to, the corporation without receiving reasonable compensation, the Commissioner shall prescribe adjustments to those items taken into account by the individual and the shareholders as may be necessary to reflect the value of the services rendered or capital furnished. For these purposes, in determining the reasonable value for services rendered, or capital furnished, to the corporation, consideration will be given to all the facts and circumstances, including the amount that ordinarily would be paid in order to obtain comparable services or capital from a person (other than a member of the family) who is not a shareholder in the corporation. In addition, for purposes of section 1366(e), if a member of the family of one or more shareholders of the S corporation holds an interest in a passthrough entity (e.g., a partnership, S corporation, trust, or estate), that performs services for, or furnishes capital to, the S corporation without receiving reasonable compensation, the Commissioner shall prescribe adjustments to the passthrough entity and the corporation as may be necessary to reflect the value of the services rendered or capital furnished. For purposes of section 1366(e), the term family of any shareholder includes only the shareholder's spouse, ancestors, lineal descendants, and any trust for the primary benefit of any of these persons.
122 Citing Cases
Commissioner, 531 U.S. 206, 209 (2001) (“Subchapter S allows shareholders of qualified corporations to elect a ‘pass-through’ taxation system under which income is subjected to only one level of taxation.”); see also Allen Fam. Foods, Inc. v. Commissioner, T.C. Memo. 2000-327, slip op. at 5 & n.3. 15 [*15] RA Hurtado summoned re
Commissioner, 531 U.S. 206, 209 (2001) (“Subchapter S allows shareholders of qualified corporations to elect a ‘pass-through’ taxation system under which income is subjected to only one level of taxation.”). 30 [*30] adjustments to petitioners’ flowthrough shares of STW’s income and any other determinations in the Notice of Defi
Commissioner, 531 U.S. 206, 209 (2001) (“Subchapter S allows shareholders of qualified corporations to elect a ‘pass-through’ taxation system under which income is subjected to only one level of taxation.”). 4 [*4] Francis Hospital in Tulsa, Oklahoma, where she worked for about six months. She subsequently worked for a staffing
Commissioner, 531 U.S. 206, 209 (2001) (“Subchapter S allows shareholders of qualified corporations to elect a ‘pass-through’ taxation system under which income is subjected to only one level of taxation.”). 47 [*47] proceeding.49 See Johnson v. Commissioner, 160 T.C. 18, 28 (2023) (citing Winter v. Commissioner, 135 T.C. 238, 2
The Spiezios acknowledge they lack a sufficient basis in R&S (an S corporation) to claim the NOL on their personal return under section 1366; however, by electing R&S to be treated as a disregarded entity for federal tax purposes, the Spiezios argue, they are entitled to 6 The general rule for accrual method taxpayers is that a liability is incurred and thus taken into account for federal income tax purposes once it has satisfied the all events test.
factor does not squarely fit in the context of an S corporation since there is generally no issuance of stock for capital; rather, capital is accounted for internally when contributed (or retained) by the shareholders as basis. See generally I.R.C §§ 1366 and 1367. We find this factor to be neutral since there was no creation of a formal debt instrument indicating indebtedness; nor was there recognition of a capital contribution by CR Maintenance. 2. The Presence or Absence of a Maturity Date A
Unlike a C corporation, an S corporation’s income and losses are treated like that of a partnership. § 1366.
In 2006 the S Corp. adopted an employee welfare benefit plan to provide its employees with life insurance and other benefits. The S Corp. selected the Legacy Employee Welfare Benefit Plan (Legacy Plan), which was funded by employer contributions to the Legacy Employee Welfare Benefit Trust (Trust).2 The S Corp. participated in the Legacy
Petitioner does not meet any of these exceptions because: (a) the Schedule K-1 income from Turner Investments is attributable to her under section 1366, not solely by the operation of community property law; (b) the Schedule K-1 is in her name, and she did not rebut the consequent presumption that the income is attributable to her; (c) her failure to claim estimated tax payments (and the IRS’ subsequent refund of those excess payments to Mr.
Pursuant to section 1366, IDG's ordinary loss flowed through to Mr.
The Legacy/Flex Plan In July 2004 Legacy Benefit Plans, LLC, an Illinois company (LBP), estab- lished the Legacy Employee Welfare Benefit Plan (Legacy Plan). The Legacy Plan was a purported multiple-employerwelfare benefit plan under section 419A(f)(6). At all relevant times LBP was the sponsor and administrator ofthe Legacy Plan. An
Under section 1366, items ofan S corporation are generally passed through to the shareholders and are not subject to tax at the corporate level. Id.; Gleason v. Commissioner, T.C. Memo. 2006-191. A corporation like G&A that lost so much money might at least produce deductible losses. But the Code limits flowthrough losses and deductions to the sum ofa sh
Under section 1366, items ofan S corporation are generally passed through to the shareholders and are not subject to tax at the corporate level. Id.; Gleason v. Commissioner, T.C. Memo. 2006-191. A corporation like G&A that lost so much money might at least produce deductible losses. But the Code limits flowthrough losses and deductions to the sum ofa sh
er own income- tax liability. An S corporation such as Exclusive Temporaries is not subject to the income tax. Sec. 1363(a). Its taxable income is computed, sec. 1363(b), and its income, deductions, and losses are passed through to its shareholders, sec. 1366. Thus, a deduction or loss against Exclusive Temporaries' income would conceivably reduce Clues' income-tax liability. The Tax Court in a collection-review case hasjurisdiction to determine only the "underlying tax liability". Sec. 6330(c)(
Mallard's Expenses for the 245 and 265 Cold Soil Properties A. Overview Respondent disallowed Schedule E rental real estate expenses relating to the 245 and 265 Cold Soil properties of$549,203 for 2003 and $477,511 for 2004. In support ofhis position, respondent raises three related arguments. First, he asserts petitioners (or Mallar
(Vibo),1 an S corporation, because pursuant to section 13662 all of 1General Tobacco, Inc., is another subch.
(Vibo), an S corporation, because pursuant to section 1366 all of the deductions and losses of Vibo properly passed through to petitioner as the sole shareholder during each of the tax years in issue.
Knottv. Commissioner, T.C. Memo. 1991-352. S corporations remain freestanding entities "independently recognizable" from their shareholders. Carlson v: Commissioner, 112 T.C. 240, 244 (1999) (citing United States v. Basye, 410 U.S. 441, 448 . (1973)). Individual taxpayers, on the other hand, are subject to tax under section 1, which
11 OPINION Pursuantto section 1366, a shareholder ofan S corporation is liable for the tax on his pro rata share ofthe corporation's gross income.
Such basis was also not adjusted for the zero passthrough losses taken into account pursuant to section 1366(a)(1) and (d)(1) in 1996.
Knott v. Commissioner, T.C. Memo. 1991-352. S corporations remain freestanding entities “independently recognizable” from their shareholders. Carlson v. Commissioner, 112 T.C. 240, 244 (1999) (citing United States v. Basye, 410 U.S. 441, 448 (1973)). Individual taxpayers, on the other hand, are subject to tax under section 1, which s
Third, we must determine whether petitioners had sufficient debt basis under section 1366 in stock of Alpine PCS, Inc.
Third, we must determine whether petitioners had sufficient debt basis under section 1366 in stock of Alpine PCS, Inc.
Section 1366(a)(1) provides that a shareholder shall take into account his pro rata share of the S corporation's items of income, loss, deduction, or credit for the S corporations taxable year ending with or in the shareholder's taxable year .
To summarize, section 1366 establishes a regime under which items of an S corporation are generally passed through to shareholders, rather than being subject to tax at the corporate level .
1999) : This court has held that mere shareholder , guaranties of S corporation indebtedness generally fail to satisfy the requirements of section 1366 ( d)(1)(B) (i .e ., economic outlay plus a direct indebtedness between the corporation and its shareholders) .
To summarize, section 1366 establishes a regime under which items of an S corporation are generally passed through to shareholders, rather than being subject to tax at the corporate level .
141, 145 (2001) ("Section 1366 permits use of S corporation passthrough items only in calculating tax liability under chapter 1, not tax liability under chapters 21 and 23--in which the Federal employment tax provisions for FICA and FUTA are located ."), affd .
Section 1366 (a) provides that a shareholder of an S corporation shall take into account his pro rata share of the S corporation's items of income, loss, deduction, or credit . However, a shareholder may deduct his share of the S corporation's losses only to the extent . of his adjusted basis in his stock of the S corporation, sec . 1366(d)(1)(A),
Under section 1366, because petitioner was the sole shareholder the gains and losses of Grand Carting pass through to petitioner, and the possibility that the assets of Grand Carting may have been earned through illegal activities does not alter the taxability of gains relating thereto . See James v . United States , 366 U .S : 213, 218 (1961) . -10- It
In calculating petitioners ' ordinary income on receipt of $1,622,050 in loan payments that petitioners received from two S corporations , the underlying issues for decision are whether for purposes of section 1366 (a)(1) petitioners ' $1,437,248 in capital contributions to the S corporations may be treated by petitioners as income to the S corporations and therefore as restoring or increasing petitioners ' tax bases in the loans they made to the S corporations or, alternatively if the answer to
In calculating petitioners ' ordinary income on receipt of $1,622,050 in loan payments that petitioners received from two S corporations , the underlying issues for decision are whether for purposes of section 1366 (a)(1) petitioners ' $1,437,248 in capital contributions to the S corporations may be treated by petitioners as income to the S corporations and therefore as restoring or increasing petitioners ' tax bases in the loans they made to the S corporations or, alternatively if the answer to
t bears the burden of proof under section 7491(a) . We hold that respondent does not ; (2) whether petitioner Joseph Dunne was a shareholder of FRC International, Inc . (FRC), in 1997 and whether petitioners must pay income tax on FRC's income under section 1366 . We hold that Mr . Dunne ceased to be a shareholder of FRC on May 8, 1997, and therefore under section 1377(a)(1) petitioners are liable for paying income tax only on Mr. Dunne's pro rata share of FRC's income on the basis of the number
Stated otherwise, section 1366 establishes a regime under which items of an S corporation are generally passed through to shareholders, rather than being subject to tax at the corporate level .
The sole ssue for decision is whether petitioner, under section 1366 , is required to include as income on his 2002 Federal income tax return his proportionate share of undistributed ncome from an S corporation in which he was a shareholder with his former wife.
Respondent argues that the reasons for disallowing the losses to - 11 - petitioners include the limitation of partnership losses to the partner's basis in a partnership interest, the at-risk limitation under section 465, the passive loss limitation rules under section 469, and the S corporation loss limitation rules under section 1366, which are all "affected item bases" for disallowing losses at the partner level .
Stated otherwise, section 1366 establishes a regime under which items of an S corporation are generally passed through to shareholders, rather than being subject to tax at the corporate level.
Nammacher’s testimony suggests that Empire tax-affected DGA’s earnings on the assumption that DGA would lose its S corporation status after or as a result of the hypothetical sale of its stock. Oliver testified that this is why MPI tax-affected DGA’s earnings. - 17 - liable for income tax on S corporation profits even if those profits a
Respondent argues that the reasons for disallowing the losses to petitioners include the limitation of partnership losses to the partner’s basis in a partnership interest, the at-risk limitation under section 465, the passive loss limitation rules under section 469, and the S corporation loss limitation rules under section 1366, which are all “affected item bases” for disallowing losses at the partner level.
carried over from 1996 pursuant to section 1366-(d) (2) .
Here, under section 1366, petitioner is not entitled to deduct in 1998 a business carryover loss from 1992.
Petitioners argue that they are entitled to a so-called pass-thru loss deduction under section 1366 for payment of a portion of petitioner-husband’s section 6672 liability.
Grey as its sole shareholder pursuant to section 1366, there can be no employer-employee relationship between it and Mr.
We conclude that petitioner understated his taxable income by failing to report constructive dividends from TCM of $308,723.36 in 1987 and his 100-percent distributive share of TCM’s unreported income of $1,421,217.97 in 1988. - 25 - B. Additions to Tax for Fraud Under Section 6653(b) 1. Background Respondent contends that petitioner is
Grey as its sole shareholder pursuant to section 1366, there can be no employer-employee relationship between it and Mr.
Sadanaga, as its sole shareholder, pursuant to section 1366.
94. Petitioner did not issue a Form W-2 to Mr. Barron for either 1995 or 1996.3 3 The record suggests that other than for $2,000 of compensation in 1994, Mr. Barron reported income from petitioner as passthrough of S corporation income, pursuant to sec. 1366, on Part II of Schedule E (Supplemental Income and Loss) of his individual income tax returns. We note that a shareholder’s share of an S corporation’s income is not subject to self- employment tax. See Durando v. United States, 70 F.3d 548,
Shareholder’s Basis Under section 1366, an S corporation shareholder may deduct his pro rata share of losses (deductions) of the S corporation.
Shareholder’s Basis Under section 1366, an S corporation shareholder may deduct his pro rata share of losses (deductions) of the S corporation.
At the time of trial, the theater company operated 19 movie theaters with a total of 198 movie screens. Along with providing motion picture entertainment, the theater company sells food and beverages at snack bars located inside its movie theaters. In order to generate significant and consistent revenues from its food services, Mr. Harki
t a timely petition seeking our review of respondent’s Notice of Determination. Discussion Petitioner contends that Mr. Yeagle was not its employee and that it properly distributed its net income to the Yeagles, as its only shareholders, pursuant to section 1366. On the other hand, respondent contends that Mr. Yeagle was an employee of petitioner because he was an officer of petitioner and performed substantial services on petitioner’s behalf. Sections 3111 and 3301 impose FICA (social security)
Three types of deductions claimed by R&J for the years 1993 and 1994, the disallowance of which would lead to a corresponding increase in petitioners’ taxable income, form the subject of this litigation. Gift Certificates In 1993, R&J paid $7,606.46 to Towsley, Inc., for 36 gift certificates. Each gift certificate was priced at $210 and
a timely petition seeking our review of respondent’s notice of determination. Discussion Petitioner contends that Dr. Sadanaga was not its employee and that it properly distributed its net income to Dr. Sadanaga, as its sole shareholder, pursuant to section 1366. On the other hand, respondent contends that Dr. Sadanaga was an employee of petitioner because he was an officer of petitioner and performed substantial services on petitioner’s behalf. Sections 3111 and 3301 impose FICA (Social Securit
OPINION Under section 1366, shareholders in an S corporation may deduct their pro rata shares of the corporation's losses to the extent the losses are supported by the shareholders' adjusted bases in the stock and in any indebtedness of the S corporation to the shareholders.
The accumulated adjustments account reflects undistributed earnings of Central on which Central’s shareholders had paid tax. See sec. 1368. This figure includes $175,000 for Colonial’s ICC operating authority. As we previously found, the ICC operating authority had no value and should not have been included in Colonial’s net asset value.
If not, respondent properly disallowed the deduction. Section 1362(a)(1) allows a small business corporation, as defined pursuant to section 1361, to elect S corporation status. An S corporation election can be made for any taxable year at any time during the preceding taxable year or on or before the 15th day of the third month of the c
Under section 1366, relating to "Pass-thru of items to shareholders," and specifically subsection (a)(2), nonseparately - 8 - computed income or loss of an S corporation is defined as gross income minus the deductions allowed to the corporation under Chapter 1 of the Internal Revenue Code. Thus, for example, assuming Aqua Sun were entitled to a deductio
d the sum of-- (A) the adjusted basis of the shareholder's stock in the S corporation * * *, and (B) the shareholder's adjusted basis of any indebtedness of the S corporation to the shareholder * * *. 23 Sec. 1374 was superseded upon the addition of sec. 1366 to the Code. Subchapter S Revision Act of 1982, Pub. L. 97-354, sec. 2, 96 Stat. 1669, 1677. - 27 - S. Rept. 1983, 85th Cong., 2d Sess. (1958), 1958-3 C.B. 922, 1141. We have construed the term "investment", as used in section 1366(d)(1)(B)
d the sum of-- (A) the adjusted basis of the shareholder's stock in the S corporation * * *, and (B) the shareholder's adjusted basis of any indebtedness of the S corporation to the shareholder * * *. 23 Sec. 1374 was superseded upon the addition of sec. 1366 to the Code. Subchapter S Revision Act of 1982, Pub. L. 97-354, sec. 2, 96 Stat. 1669, 1677. - 27 - S. Rept. 1983, 85th Cong., 2d Sess. (1958), 1958-3 C.B. 922, 1141. We have construed the term "investment", as used in section 1366(d)(1)(B)
However, we find the citation to be inapposite.
If not, then respondent properly disallowed the loss so claimed. An election to be treated as an S corporation must "be made in such manner as the Secretary shall by regulations prescribe." Sec. 1377(c). Pursuant to section 1.1362-6(a)(2), Income Tax Regs., a corporation elects under section 1362(a) to be treated as an S corporation by f
We must decide the following issues: (1) Whether, under section 1366, petitioners Richard J.
OPINION Under section 1366, S corporation shareholders may deduct their pro rata share of losses and deductions of the S 3 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years under consideration, and all Rule references are to this Court's Rules of Practice and Procedure.
RTA determined that it suffered a loss in 1991 on its investment in certain technology and reported that loss to its shareholders (the shareholders), each of whom claimed his or her (her) pro rata share on her 1991 Federal income tax return. Respondent does not question RTA’s investment in the technology; respondent questions only whethe
However, the legislative history provides guidance with respect to section 1366: The following examples illustrate the operation of the bill’s pass through rules.
Whether petitioner, pursuant to section 1366, is entitled to deduct losses relating to M&L Business Machine Co., Inc.
During the years in issue, FGI was an S corporation under section 1366 and filed U.S.
Pursuant to section 1366, S corporation income, losses, deductions, and credits are passed through pro rata to shareholders.
Pursuant to section 1366, S corporation income, losses, deductions, and credits are passed through pro rata to shareholders.
Amounts which must be taken into account in computing a shareholder's income tax by reason of the provisions of * * * [a predecessor of section 1366] of the Code, are not derived from a trade or business carried on by such shareholder.
subject to the shareholders' personal income tax, secs. 61(a), 316. The profits of a subchapter S corporation, however, are generally not subject to a corporate tax, sec. 1371(a), but pass through to be taxed on the individual shareholders' returns, sec. 1366, thereby eliminating the double taxation of distributions to the shareholders of C corporations. Moreover, petitioners have failed to show that Dura-Craft had a business purpose in making the payments. Furthermore, the payments served no pu
subject to the shareholders' personal income tax, secs. 61(a), 316. The profits of a subchapter S corporation, however, are generally not subject to a corporate tax, sec. 1371(a), but pass through to be taxed on the individual shareholders' returns, sec. 1366, thereby eliminating the double taxation of distributions to the shareholders of C corporations. Moreover, petitioners have failed to show that Dura-Craft had a business purpose in making the payments. Furthermore, the payments served no pu
withdrawn amounts were provided without any date for repayment, and Development made no demands for repayment. 12(...continued) sec. 1371(a)(1), S corporations generally do not produce any current earnings and profits, sec. 1371(c)(1). Furthermore, sec. 1366 provides, in general, that the gross income of an S corporation is included pro rata in the gross income of its shareholders, and sec. 1367 provides the general rule that the basis of each shareholder's stock is increased by the items of S
subject to the shareholders' personal income tax, secs. 61(a), 316. The profits of a subchapter S corporation, however, are generally not subject to a corporate tax, sec. 1371(a), but pass through to be taxed on the individual shareholders' returns, sec. 1366, thereby eliminating the double taxation of distributions to the shareholders of C corporations. Moreover, petitioners have failed to show that Dura-Craft had a business purpose in making the payments. Furthermore, the payments served no pu
ly because, to the extent at issue here, such income was not required to be included on petitioners’ returns.) At the hearing on these matters, however, respondent abandoned those prior arguments and argued the following position: If the Court were to hold that excluded COD [cancellation (discharge) of indebtedness] is an item of income under Code section 1366, then you would have to find that it flows through to the taxpayers and they increase their basis.
ick, Maine. Marriner Lumber’s -7- business activity includes the manufacture and retail sale of lumber and building products. On December 31, 1986, Marriner Lumber made an election to be taxed as a “small business corporation” (S corporation) under section 1366. In 1990 and 1991, Marriner Lumber had approximately 50 employees and gross receipts of $5,244,932 and $4,491,418, respectively. During this same time, Mr. Lamb was president of Marriner Lumber and owned 50.6670 percent of its outstanding
Introduction Under section 1366, a shareholder in an S corporation is entitled to take into account his or her pro rata share of the corporation’s losses.
Section 1366 requires a shareholder of an S corporation to include in his gross income his pro rata share of the corporation’s items of income and deduction. A shareholder of an S corporation must include those items in his gross income in his taxable year in which the taxable year of the S corporation ends. Sec. 1366(a). Courts look to beneficial
53.59 Total 100 For the year 1991, the corporation filed Form 1120-S as an S corporation, and attributed its net income to petitioners in 3 ratable shares as the shareholders of the corporation, pursuant to section 1366.2 Upon examination of the S return, respondent determined that the income shown by petitioners resulting from the sale of certain property by the corporation was not correctly reported in the corporation's S return nor by petitioners, and the above notices of deficiency resulted.
53.59 Total 100 For the year 1991, the corporation filed Form 1120-S as an S corporation, and attributed its net income to petitioners in 3 ratable shares as the shareholders of the corporation, pursuant to section 1366.2 Upon examination of the S return, respondent determined that the income shown by petitioners resulting from the sale of certain property by the corporation was not correctly reported in the corporation's S return nor by petitioners, and the above notices of deficiency resulted.
not be held liable for the deficiencies determined herein. OPINION Petitioner was the sole shareholder of DRPC, a subchapter S corporation, and claimed deductions in 1987 and 1988 under section 1366(a) to reflect losses incurred by DRPC.2 Section 2 Sec. 1366 in part provides: (a) Determination of Shareholder's Tax Liability.-- (1) In General.--In determining the tax under this chapter of a shareholder * * * there shall be taken into account the shareholder's pro rata share of the corporation's-
ether petitioners are entitled to deduct embezzlement losses of $21,800 and $215,000 in 1985 and 1986, respectively; (3) whether petitioners are entitled to deductions of $20,253, $141,418, and $37,348 in 1985, 1986, and 1987, respectively, for ordinary losses allegedly incurred by Ard Rhei, Inc., a small business corporation (S corporation) under section 1366;2 (4) whether petitioner John J.
The issues for decision are: (1) Whether petitioners have substantiated the basis of their stock in Vosburg Hotels, Inc., a "small business corporation" under section 1366,1 so as to enable them to claim a deduction for an ordinary loss of $129,083 and a deduction pursuant to section 179 of $3,057; (2) whether petitioners are entitled to a long-term capital loss carryover from 1987 of $61,468; and (3) whether petitioners' taxable income should be increased in the amount of $7,399 for Social Secu
Introduction Under section 1366, a shareholder in an S corporation is entitled to take into account his or her pro rata share of the corporation's losses.
Introduction Under section 1366, a shareholder in an S corporation is entitled to take into account his or her pro rata share of the corporation's losses.