§1366 — Pass-thru of items to shareholders

Unlike a C corporation, an S corporation’s income and losses are treated like that of a partnership. § 1366.

However, we find the citation to be inapposite.

§ 1366(a) (providing that an S corporation shareholder shall take into account his pro rata share of, among other things, the corporation’s loss for the tax year).13 Even if we assume that HCM was entitled to claim a deduction for the asset seizures (a question we need not decide here), Mr.

Pursuant to section 1366, IDG's ordinary loss flowed through to Mr.

(Vibo),1 an S corporation, because pursuant to section 13662 all of 1General Tobacco, Inc., is another subch.

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.

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.

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

However, the legislative history provides guidance with respect to section 1366: The following examples illustrate the operation of the bill’s pass through rules.

(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.

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.

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) .

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.

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.

Grey as its sole shareholder pursuant to section 1366, there can be no employer-employee relationship between it and Mr.

Shareholder’s Basis Under section 1366, an S corporation shareholder may deduct his pro rata share of losses (deductions) of the S corporation.

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)

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.

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.

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

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.

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

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

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.

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

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

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 .

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

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 .

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.

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.

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

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.

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

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

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)

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

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

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.

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-

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.