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Tax Treatment of S Corporation Shareholders

Product Code - TMA05
Speaker(s): Samuel P. Starr, PricewaterhouseCoopers and Horacio Sobel, PricewaterhouseCoopers
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S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to generally avoid double taxation on the corporate income.

This presentation focuses on the importance of basis in stock and debt on the ability of S corporation shareholders to use losses, and considers the at-risk and passive activity loss limitations.

I. In General

a. Profit-Loss Pass Through to Shareholders

i. Separately stated items

ii. Non-separately stated items

b. Character and Timing of Flow-Through Items

i. The character of all S corporation items flow through to shareholders

ii. Per share/per day timing of reporting items to shareholders

c. Adjustments to Shareholder Basis in Stock and Debt

i. Adjustments for capital contributions, income and deduction, and distributions

ii. Importance of tracking shareholder basis in stock and debt

iii. Ordering rules

iv. Post-termination transition period

v. Treatment of NOLs

II. Stock Basis

a. Separate Share Rule to Determine Stock Basis

i. Separate share rule

ii. “Pour over” rule to use losses

b. Ordering of Stock Basis Adjustments

i. Increases and decreases

ii. Net negative adjustments

c. Timing of Basis Adjustments

i. In general

ii. Charitable contributions by S corporations

III. Basis in Shareholder Debt

a. Basis in shareholder debt to use losses

i. Reducing debt basis

ii. Multiple debts

iii. Capital gain on repayment

iv. Open account debt

v. Basis restoration before stock

b. Guaranteed Loans

i. Economic outlay

ii. Negligence penalty

c. Related Party Loans

d. Debt Substitutions

e. Back-to-Back Loans

IV. Debt Discharge by Outside Creditors

a. Gitlitz v. Comr.

b. Regulation Project Under Consideration

V. Loss Limitations

a. At-Risk Rules

i. Distinct from basis limitation

ii. Qualified non-recourse financing

iii. Related party rules

iv. Aggregation rules

v. Recapture

b. Passive Activity Rules

i. Active participation

ii. Material participation

iii. Rental real estate exclusions

Samuel P. Starr, PricewaterhouseCoopers and Horacio Sobel, PricewaterhouseCoopers

Samuel P. Starr, PricewaterhouseCoopers LLP

Samuel P. (Sam) Starr is the Tax Matters Partner (chief internal tax officer) for PricewaterhouseCoopers LLP (USA). Sam has been a PwC partner for 23 years, and has 33 years experience with the firm.

Before his current role, Sam served as co-leader of his firm’s WNTS Pass Through Entities practice, focusing on partnerships, limited liability companies, and S corporations. Sam is an Adjunct Professor of Law at Georgetown University Law Center, where he teaches taxation of limited liability companies and S corporations.

Sam is nationally recognized for his expertise on S corporations and is the co-author of the two current BNA Tax Management Portfolios on the subject. Sam also serves as a departmental editor for RIA's Journal of Taxation (Partnerships, S Corporations & LLCs) . Also, Sam has co-authored a BNA Tax Management Portfolio on limited liability companies and has written various partnership tax articles.

Among other professional activities, Sam formerly chaired the AICPA's S Corporation Committee. Sam is a frequent speaker and has been quoted in the national press on general tax matters.

Sam is a CPA and received his B.S. in Accounting, with honors, from the Pennsylvania State University, J.D. from the University of Virginia, and LL.M. in Taxation from the Georgetown University Law School.

Horacio E. Sobol, PricewaterhouseCoopers LLP

Horacio Sobol is a partner in the PricewaterhouseCoopers LLP (“PwC”) National Tax Services office in Washington D.C. He is part of the national Mergers and Acquisitions Group and specializes in advising on corporate transactions.

Mr. Sobol consults on several of the firm’s clients regarding merger and acquisition matters in order to efficiently achieve their business objectives while managing associated tax ramifications of such restructuring and acquisitions. These clients include domestic and foreign multinational corporations with significant U.S. presence. His responsibilities include drafting and reviewing opinion letters, private letter ruling requests, and technical memoranda and consulting on business reorganization and acquisition transactions. Mr. Sobol also instructs consolidated returns, reorganizations, and S corporation classes at national training sessions for PwC.

Mr. Sobol is a member of the AICPA. He received his Bachelor of Business Administration and Masters of Accounting from the University of Michigan.