Massachusetts Society of CPA's 2012 Year End Tax Update - S Corps

Transcription

1 Massachusetts Society of CPA's 2012 Year End Tax Update - S Corps Current State Developments a. Reduced corporate rate from 8.25% (2011) to 8.0% (2012) b. S corp rate when gross receipts exceed $9.0M reduced from 2.95% (2011) to 2.7% (2012) c. S corp rate when gross receipts between $6.0M and $9.0M reduced from 1.97% (2011) to 1.8% (2012). d. Unitary Reporting Form 355U will continue to include non income measure of excise tax Federal Tax Day - Current,L.21,Code Sec. 6501: Statue of Limitations Not Extended to Personal Tax Liability of S Corporation Shareholder Who Did Not Participate in Fraud (CCA ),(Sep. 24, 2012) The statute of limitations on assessment was not extended under Code Sec. 6501(c)(1) for the personal tax liability of an S-Corporation shareholder who did not take part in the fraud reflected on the S Corporation s Form 1120S tax return. The individual shareholder and one other individual were equal owners in the S corporation. The other shareholder contacted vendors who worked for him personally and caused numerous personal expenses to be deducted on the corporation s tax return as business expenses. The income for both shareholders that was passed through was understated, and the two shareholders omitted income from their personal tax returns for the year at issue. The second shareholder was convicted of tax fraud. However, there is no evidence that the first shareholder participated in or was aware of the fraudulent activities with respect to the corporation. In addition, he did not participate in the preparation of the 1120S corporate return. The second shareholder s intent was to evade only his own tax, and any deficiency on the first shareholder was merely a by-product of that intent. Federal Tax Day - Current,L.14,Code Sec. 1361: Extension of Time for QSub Election Granted (LTR ),(Sep. 24, 2012) Six S corporations were granted extensions of time in which to elect to treat subsidiaries as qualified subchapter S subsidiaries. They had inadvertently failed to file Forms 8869 on behalf of the subsidiaries. IRS Letter Ruling IRS Letter Ruling IRS Letter Ruling IRS Letter Ruling IRS Letter Ruling

2 IRS Letter Ruling Federal Tax Day - Current,L.13,Code Sec. 1362: S Corporation Elections Inadvertently Terminated; Extensions Granted (LTR , ),(Sep. 17, 2012) The S corporation status of two corporations was inadvertently terminated when, in each case, the corporation failed to timely file Forms 8869, Qualified Subchapter S Subsidiary (QSub) Election. In both cases, a 120-day extension of time was granted to file the election. IRS Letter Ruling IRS Letter Ruling Federal Tax Day - Current,L.15,Code Sec. 1362: Extension Granted to Make S Corporation Election (LTR ),(Sep. 24, 2012) A corporation was granted an extension of time to file Form 2553, Election by a Small Business Corporation, to make the S corporation election under Code Sec. 1362(b)(5). The corporation established reasonable cause for failing to make a timely election and it was granted an extension of 120 days to make the election. Federal Tax Day - Current,L.16,Code Sec. 1362: Company Granted Extension to Make S Corp Election, Shareholders Required to File Consistent Returns (LTR ),(Sep. 24, 2012) A company was eligible for relief under Code Sec. 1362(b)(5) and its election would be considered timely if it filed a completed Form 2553 with the appropriate service center within 120 days following the date of this letter. The company s election to treated as an S corporation would have been ineffective because the company s parent company was an ineligible shareholder. The ineffectiveness would have been inadvertent within the meaning of Code Sec. 1362(f), The company and its four eligible S corporation shareholders were required to file income tax returns (original or amended) consistent with the company now being an S corporation. IRS Letter Ruling IRS Letter Ruling IRS Letter Ruling IRS Letter Ruling Federal Tax Day - Current,L.17,Code Sec. 1362: S Corporation Elections Terminated Inadvertently (LTR , , ),(Sep. 24, 2012) S corporation elections made by three corporations were each terminated inadvertently under Code Sec. 1362(f). In two cases, the trusts satisfied the requirements to be treated as Qualified Subchapter S Trusts (QSSTs), except that the trusts did not make timely elections under Code

3 Sec. 1361(d)(2). The elections were required to be filed within 120 days to allow the corporations to continue to be valid S corporations. In the third case, the S corporation election and the QSub election were also terminated inadvertently under Code Sec. 1362(f). The ruling was contingent upon the trustees of the trust filing an electing small business trust (ESBT) election within 120 days and the trust filing any amended returns and paying any additional tax and interest due. IRS Letter Ruling IRS Letter Ruling IRS Letter Ruling Federal Tax Day - Current,L.18,Code Sec. 1362: S Corporation s Failure to Make Appropriate ESBT and QSST Elections Were Inadvertent (LTR ),(Sep. 24, 2012) An S corporation and its shareholders were granted relief and were allowed 120 days in which to file the appropriate Electing Small Business Trust (ESBT) and Qualified Subchapter S Trust (QSST) elections. The failure to make the elections was inadvertent within the meaning of Code Sec. 1362(f) and not motivated by tax avoidance or retroactive tax planning. Further, had the election been effective, it would have been terminated due to ineligible shareholders. The potential terminations were also inadvertent. IRS Letter Ruling Federal Tax Day - Current,L.14,Code Sec. 1362: Tax Issues Relating to Administrative Dissolution and Subsequent Reincorporation of S Corporation Addressed (LTR ),(Sep. 17, 2012) The IRS addressed the tax issues relating to the administrative dissolution of an S corporation under state law and its subsequent reincorporation. Based solely on the facts submitted and the representations made, the IRS concluded that the S corporation qualified as a small business corporation, prior to the administrative dissolution. It was also determined that (1) The entity s status as an S corporation was not terminated by reason of its administrative dissolution; (2) it was not required to make a new election under Code Sec. 1362(a); (3) the administrative dissolution and subsequent reincorporation did not, by itself, result in a distribution or transfer of property for purposes of Code Sec. 301(a), 311(a)(2), 331(a), 336(a), or 351; (4) the administrative dissolution and subsequent reincorporation did not affect its shareholders basis and holding periods in the S corporation stock; and (5) it could use the employer identification number assigned to it prior to its administrative dissolution and was, therefore, not required to apply for the assignment of a new employer identification number following its reincorporation. IRS Letter Ruling

4 Federal Tax Day - Current,L.4,Code Sec. 336: Basis Adjustment in S Corporation Liquidations Addressed (CCA ),(Sep. 17, 2012) The Office of the Chief Counsel addressed whether the assumption of a liability by an S corporation associated with the distribution of encumbered assets to a shareholder, in exchange for the shareholder s stock in the corporation upon complete liquidation, would result in an increase in the shareholder s stock basis. It determined that, although the liabilities associated with the distributed assets were accounted for in calculating the S corporation s gain or loss on the assets under Code Sec. 336, there is no adjustment to the shareholder s stock basis associated with the assumption of the liability on liquidation. CCA Letter Ruling Federal Tax Day - Current,L.11,Code Sec. 1361: Disproportionate Distributions to Shareholders Did Not Create Second Class of Stock (LTR ),(Sep. 11, 2012) Disproportionate distributions made to a S corporation s shareholders did not create a second class of stock within the meaning of Code Sec. 1361(b)(1)(D). The entity s S corporation election was, therefore, not terminated, provided that, within 120 days, corrective distributions and payments were made so that each shareholder would receive payments proportionate to their interests. IRS Letter Ruling Federal Tax Day - Current,L.16,Code Sec. 1361: Disproportionate Distributions to Shareholders Did Not Create Second Class of Stock (LTR ),(Aug. 27, 2012) Disproportionate distributions made to a S corporation s two shareholders did not create a second class of stock within the meaning of Code Sec. 1361(b)(1)(D). The entity s S corporation election was, therefore, not terminated, provided that, within 120 days, corrective distributions and payments be made so that each shareholder would receive distributions proportionate to his or her interest. IRS Letter Ruling Federal Tax Day - Current,L.13,Code Sec. 1361: Trust Was Qualified Subchapter S Trust (LTR ),(Aug. 20, 2012) A trust, modified by the order of a state court, was permitted to be treated as a Qualified Subchapter S Trust (QSST) under Code Sec. 1361(d)(3). The trust was created under a will for the benefit of an individual who was also the trustee, and he had the power to appoint the income of the trust to someone other than himself. The state court removed the power to appoint the income of the trust to someone other than himself to permit the trust to qualify as a QSST.

5 IRS Letter Ruling Federal Tax Day - Current,L.14,Code Sec. 1362: S Corporation Ineffective Due to Failure to File ESBT Elections (LTR ),(Aug. 20, 2012) An S corporation s election to be treated as an S corporation may have been ineffective because of its failure to file an electing small business trust (ESBT) elections for two trusts. Furthermore, the failure was inadvertent within the meaning of Code Sec. 1362(f). The ruling was contingent upon the filing of elections to treat two trusts as being eligible as electing small business trusts (ESBTs). IRS Letter Ruling Federal Tax Day - Current,J.2,S Corporation Liable for Employment Taxes; Workers Were Employees, Not Contractors; Penalties Imposed (Atlantic Coast Masonry, Inc., TCM),(Aug. 14, 2012) Masons and laborers who performed services for an S corporation were employees, rather than independent contractors, and the S corporation was liable for employment taxes and penalties. The S corporation acted as a subcontractor providing masonry services using the services of numerous workers. Following the reclassification of the workers, the IRS determined deficiencies and imposed additions to tax for failure to timely file returns and failure to timely pay taxes, and penalties for failure to deposit employment taxes. The taxpayer used the services of a number of masons and laborers, each of whom was retained and paid on a per-job basis. The court reviewed factors relevant to determining employee status, including: (1) the degree of control exercised by the principal over the details of the work; (2) which party invests in the facilities used by the workers; (3) the opportunity of the worker for profit or loss; (4) whether the principal can discharge the worker; (5) whether the work is part of the principal s regular business; (6) the permanency of the relationship; and (7) the relationship the parties believe they were creating. Factors (1), (3), (4) and (5) weighed in favor of an employee classification, factor (6) weighed in favor of an independent contractor classification, and factors (2) and (7) carried no weight. The taxpayer sought relief under the Revenue Act of 1978, P.L , Sec. 530, which allows relief from reclassification of workers if: (1) the taxpayer did not treat the workers as employees; (2) the taxpayer consistently treated the workers as nonemployees on all tax returns; and (3) the taxpayer had a reasonable basis for not treating the workers as employees. Since the taxpayer did not file required information returns, including Forms 1099-MISC, with the IRS for any of the workers in question, the requirements for Sec. 530 relief were not met, and the taxpayer did not qualify for relief. The taxpayer was liable for all assessed additions to tax and penalties because it failed to show reasonable cause for: (1) failure to timely make the proper return filings under Code Sec. 6651(a)(1); (2) failure to timely pay the amounts of tax shown on the returns under Code Sec. 6651(a)(2); or (3) failure to timely make the required deposits under Code Sec. 6656(a).

6 Atlantic Coast Masonry, Inc., TC Memo , Dec. 59,160(M) Federal Tax Day - Current,L.15,Code Sec. 1361: Gain From Sale of Company s Assets Allocable to Trust Holding Shares of Company Stock (LTR ),(Aug. 13, 2012) The gain from the deemed sale of company assets to a C corporation, resulting from a Code Sec. 338(h)(10) election that was allocable to the shares of stock of the company held by a trust, was that of the trust and not of the income beneficiary of the trust. No opinion was expressed or implied concerning whether the S corporation election made by the company was a valid election under Code Sec. 1362, whether the trust was a qualified subchapter S trust (QSST) under Code Sec. 1361(d), or the validity of the Code Sec. 338(h)(10) election made by the company and the purchaser. IRS Letter Ruling Federal Tax Day - Current,L.18,Code Sec. 1362: Income Received from Leasing Real Estate Property Was Not Passive (LTR ),(Aug. 13, 2012) Rental income received from leasing real estate property, by a company that had elected to be treated as an S corporation, was not passive income. The company, through its shareholders and officers, performed significant services and incurred substantial costs associated with the properties. Consequently, a statement attached to the company s Form 1120S, U.S. Income Return for an S Corporation, indicating that the company s S corporation election had terminated because of excess passive investment income was not an effective revocation of the company s S corporation election. IRS Letter Ruling Federal Tax Day - Current,J.6,S Corporation s Payment of Shareholders Tax Liability Attributable to Pass-Through Items Not Fraudulent Transaction (In re Kenrobe Information Technology Solutions, Inc., BC-DC Va.),(Aug. 1, 2012) A debtor S Corporation s payment/reimbursement of its shareholders additional personal income tax liability attributable to pass-through items was not a fraudulent conveyance. The Chapter 7 trustee s claim that the payment/reimbursement was fraudulent because it lacked consideration was without merit. The shareholders agreed to make the election to tax the corporation under Subchapter S in return for the corporation s promise to pay any additional tax liability resulting from the pass-through items, which amounted to consideration. The corporation derived a continuing benefit from the arrangement because the tax it paid as an S corporation was significantly less than the tax it would have paid as a C corporation. Also, the corporation was able to use the undistributed income payable to the shareholders as operating income because the shareholders did not need distributions to pay their taxes. Therefore, the agreement between the shareholders and the corporation was valuable consideration to the corporation where the tax payments on behalf of the shareholders represented only the passthrough tax liability and the payment of the associated tax liability did not constitute a constructively fraudulent transaction.

7 In re Kenrob Information Technology Solutions, Inc., BC-DC Va., ustc 50,491 Federal Tax Day - Current,I.1,IRS Corrects Hearing Date in Proposed Regs Clarifying S Corporation Shareholder s Basis in Indebtedness Rules (NPRM REG ),(Jul. 6, 2012) The IRS has corrected proposed amendments to regulations relating to an S corporation shareholder s basis in the corporation s indebtedness (NPRM REG , I.R.B , 5; TAXDAY, 2012/06/12, I.1). The date of the hearing has been corrected to read October 9, 2012, instead of October 8, Proposed Regulations, NPRM REG , Correction Federal Tax Day - Current,J.3,Agricultural Workers Were Employees for Federal Employment Tax Purposes; S Corporation Subject to Addition to Tax for Failure to File Returns and Penalty for Failure to Make Deposits (Twin River Farms, Inc, TCM),(Jul. 3, 2012) Two agricultural workers were employees of an S corporation for purposes of federal employment taxes during the years at issue. The degree of control the corporation had over the workers supported the existence of an employer-employee relationship. The taxpayer invested in all of the equipment used by the workers to perform their duties. The workers were paid a salary and they lacked any risk of gain or loss. The workers did not have any formal or informal agreement with the S corporation with respect to the right to discharge and they provided services that were supportive of the S corporation s business, They lived in housing provided by the S corporation on the S corporation s property, and finally, the taxpayer purchased workers compensation and employer s liability insurance for the years at issue. The S corporation was liable for the addition to tax under Code Sec. 6651(a)(1) because it submitted no evidence that it exercised ordinary business care and prudence in its failure to file Forms 943. The S corporation was also liable for a penalty under Code Sec for failure to make deposits of employment taxes, as it submitted no evidence that it exercised ordinary business care and prudence in its failure to make the deposits. Twin Rivers Farm, Inc., TC Memo , Dec. 59,107(M Federal Tax Day - Current,J.2,S Corporation Bases Reduced, Losses Disallowed, Filing Status Changed, and Penalties Imposed on Individuals (Welch, TCM),(Jun. 29, 2012) Married individuals who owned an S corporation were denied deductions based on pass-through losses because their bases in the S corporation were reduced to zero. In addition, the husband was denied head-of-household (HOH) filing status and accuracy-related penalties were imposed on both taxpayers. The husband and wife owned 20 percent and 80 percent, respectively, of the S corporation. They made a number of payments to the S corporation that they claimed were loans that increased their bases in the company.

8 However, their records were inconsistent with their asserted bases in the S corporation and, therefore, inadequate to prove those bases. Consequently, the court treated the taxpayers bases as zero. Since pass-through losses can only be deducted to the extent of a taxpayer s basis in an S corporation under Code Sec. 1366(d)(1), their deductions based on those pass-through losses were disallowed. The husband claimed HOH filing status for one of the years at issue. However, the evidence showed that he was married, which disqualified him from that status under Code Sec. 2(b). Therefore, the IRS s determination of an increased deficiency was sustained. Finally, the taxpayers were both assessed accuracy-related penalties under Code Sec The taxpayers were responsible for keeping adequate records and substantiating items properly under Reg (b)(1), but they did not consistently keep contemporaneous records to reflect their bases in the S corporation. Additionally, they failed to produce records or any evidence supporting their position that they had bases sufficient to deduct their claimed losses in the S corporation. Finally, the taxpayers did not act reasonably and in good faith by relying on the advice of competent professionals, since they did not provide the alleged professionals with adequate records and did not demonstrate the competence of the professional who signed the returns for one of the years at issue. Y. Welch, TC Memo , Dec. 59,102(M) Federal Tax Day - Current,J.1,Acquisition of S Corporation Not Motivated by Tax- Avoidance Purposes (Love, TCM),(Jun. 14, 2012) A married couple acquired stock in an S corporation for legitimate business reasons and not for tax-avoidance purposes; therefore, penalties were inapplicable. The taxpayers ran several fastfood restaurants and created a management company to employ personnel, pay them, and maintain liability insurance and an employee health care plan. The taxpayers maintained a profitsharing plan (PSP) but replaced it with a new structure under which a newly created employee stock ownership plan (ESOP) owned the management company, now restructured as an S corporation. They also created a nonqualified deferred compensation plan (NQDCP) for the benefit of themselves and other senior employees of the management company. Only the taxpayers participated in this plan, under which a significant sum was deferred, with a corresponding obligation to pay that sum to the taxpayers in the future. Because the management company was an S corporation, its income flowed through to its sole shareholder, the ESOP, which was a taxexempt entity. Because of the large repayment obligation, the ESOP was of little value to the rank-and-file employees. Congress enacted Code Sec. 409(p) to prevent abuses by ESOPs, limiting tax benefits enjoyed by ESOPs that own S corporations unless the ESOP provides a meaningful benefit to rank-and-file employees. The IRS issued regulations relating to the new law, under which the taxpayers would have been required to include the entire amount of deferred compensation on their returns, and

9 would have been subject to a 50-percent excise tax on that amount. Further, the ESOP would have been disqualified. To avoid these consequences, the taxpayers purchased the stock of the management company, receiving the entire deferred compensation amount, which was included in their income that year. The NQDCP and ESOP were terminated, and a new PSP was created. The management company took a deduction for the amount of deferred compensation paid, which then flowed through to the taxpayers, as sole shareholders of the S corporation management company. The taxpayers then transferred an amount close to the amount of deferred compensation they received to the management company as a capital contribution, increasing their bases in that company so as to take full advantage of the loss. The IRS, under Code Sec. 269, determined that the taxpayers acquisition of the management company was for the purpose of avoiding or evading taxes by obtaining a loss deduction to which they would not otherwise have been entitled. The Tax Court found that the taxpayers had legitimate nontax business reasons for purchasing the stock of the management company. Further, the IRS regulations effectively required the taxpayers to take some action. Finally, the payout of deferred compensation to the taxpayers was in direct response to the IRS s "invitation" under the regulations for taxpayers to make such payouts. All of the other actions taken by the taxpayers, such as splitting their tax year into two periods, one before and one after the acquisition of the management company, and making the capital contribution to that company, were authorized by law and were real economic events with substantive consequences. The steps taken by the taxpayers were planned as a means of avoiding problems created by the new regulations, restructuring the management company, and terminating the ineffective ESOP, and were legitimate business transactions. Accordingly, penalties under Code Sec were not imposed. Federal Tax Day - Current,I.1,Clarification of S Corporation Shareholder s Basis in Indebtedness Rules Proposed (NPRM REG ),(Jun. 12, 2012) The IRS has proposed amendments to regulations relating to an S corporation shareholder s basis in the corporation s indebtedness. The proposed amendments provide that, in order to increase a shareholder s basis in indebtedness, a loan must be a bona fide indebtedness of the S corporation that runs directly to the shareholder. The proposed regulations also reaffirm that a shareholder acting as guarantor of S corporation indebtedness does not create or increase basis in indebtedness simply by becoming a guarantor. The proposed regulations affect shareholders of S corporations and will apply to loan transactions entered into on or after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. The proposals clarify the requirements for increasing basis in indebtedness and assist S corporation shareholders in determining with greater certainty whether their particular arrangement creates basis in indebtedness. The proposals require that loan transactions represent bona fide indebtedness of the S corporation to the shareholder in order to increase basis in indebtedness; therefore, an S corporation shareholder need not otherwise satisfy the "actual economic outlay" doctrine for purposes of Code Sec. 1366(d)(1)(B). The proposals do not

10 attempt to provide a different standard for what constitutes "bona fide" indebtedness. Rather, general federal tax principles determine whether indebtedness is bona fide. Comments & Hearing Comments must be received by September 11, Submissions should be mailed to CC:PA:LPD:PR (REG ), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C ; may be hand-delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (REG ), Courier s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, D.C.; or sent electronically, via the Federal erulemaking Portal at (IRS REG ). Requests to speak and outlines of topics to be discussed at the public hearing must be received by September 11, The public hearing will be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, D.C., on October 9, Proposed Regulations, NPRM REG , 2012FED 49,537 K.H. Love, TC Memo , Dec. 59,088(M) Federal Tax Day - Current,J.1,Neither Couple nor Their S Corporation Entitled to First- Time Homebuyer Credit for Purchase by S Corporation of Couple s Principal Residence (Trugman, TC),(May 22, 2012) A couple was not entitled to claim the first-time homebuyer credit because their principal residence was purchased by an S corporation. Even though they were the sole shareholders of the S corporation, the purchase of the home by the S corporation did not qualify them as purchasers of the home. The S corporation could not claim the credit because only an individual, as determined under Code Sec. 36, can claim the credit and the S corporation did not qualify as an individual. It did not matter that IRS representatives may have indicated to the couple that they could claim the credit if the property was purchased through the S corporation because incorrect legal advice does not have the force of law. J. Trugman, 138 TC, No. 22, Dec. 59,065 Federal Tax Day - Current,L.14,Code Sec. 1361: Redemption Agreements Did Not Create Second Class of Stock (LTR ),(May 7, 2012) An S corporation s redemption agreements entered into in order to purchase and redeem all of its outstanding shares held by shareholders was not treated as a second class of stock within the meaning of Code Sec. 1361(b)(1)(D), and would be disregarded in determining whether the outstanding shares of the S corporation conferred identical rights. The redemption agreements were not designed or intended to circumvent or otherwise violate the second class of stock rule of Reg (l)(2)(iii)(A). Furthermore, the redemption agreements did not establish a

11 purchase price for the stock that, at the time that the redemption agreements were entered into, was significantly in excess of or below the fair market value of the stock. IRS Letter Ruling Federal Tax Day - Current,J.1,Six-Year Assessment Limitation Period Did Not Apply to Deficiency from Overstated Basis (Home Concrete & Supply, LLC, SCt),(Apr. 26, 2012) A taxpayer s overstatement of its basis in an asset that resulted in an understatement of gross income from the asset s sale did not trigger the extended limitations period under Code Sec. 6501(e)(1)(A) because a basis overstatement is not an "omission from gross income." Ordinarily, the IRS must assess a deficiency against a taxpayer within three years after the return was filed, but that period is extended to six years when a taxpayer "omits from gross income" an includible amount of more than 25 percent. The Court s previous interpretation of identical language in Colony, Inc., SCt, 58-2 ustc 9593, which limited the statute s scope to situations where specific receipts were left out of the computation of gross income, controlled. The IRS s attempts to challenge the interpretation of Code Sec. 6501(e)(1)(A) were rejected because the language differences between the 1939 and 1954 versions of the statute were not significant. The Court also rejected the IRS s argument that Reg (e)-1(e) was entitled to Chevron deference because it was an agency s construction of a statute that it administers. Colony already interpreted the statute and there was no longer any different construction consistent with Colony that the IRS could adopt. Affirming CA-4, ustc 50,207. Home Concrete & Supply, LLC, SCt, ustc 50,315 Federal Tax Day - Current,J.8,Termination of Parent Company s S Corporation Status Resulted in Post-Petition Transfer of Debtor s Property from Bankruptcy Estate (In re The Majestic Star Casino, LLC, DC Del.),(Jan. 31, 2012) A parent company s revocation of its S corporation status subsequent to the filing of the bankruptcy petition by its debtor, a qualified subchapter S subsidiary (QSub), terminated its QSub status, which resulted in post-petition transfer of the debtor s property from the bankruptcy estate in violation of section 362 of the Bankruptcy Code. The QSub had a property interest in the benefits that the status afforded, including the ability to pass-through tax liability and the net operating losses to its shareholders. Due to the revocation of the S corporation status, the tax burden was shifted from the controlling shareholder to the debtor. Accordingly, its potential tax liabilities became an obligation of the estate and its creditors, and their payment ultimately resulted in diminished estate funds that were available for satisfy creditors claims. The parent company s claim that QSub did not have a property interest in its tax status since the decision to elect or revoke the status was held by the non-debtor parent was rejected because the property interest existed even if it was contingent on the non-debtor parent s actions. Since the parent company did not seek permission or notify the court or the debtor regarding the

12 revocation, it was unauthorized and avoidable pursuant to section 549 of the Bankruptcy Code. The revocation diminished the creditors recovery. Any post-petition act that caused the debtor to lose this status was an act to exercise control over property of the estate and therefore, a violation of the automatic stay provision. In re The Majestic Star Casino, LLC, BC-DC Del., ustc 50,175 Federal Tax Day - Current,J.2,Court to Reconsider Whether Warrants Constituted Second Class of Stock (Santa Clara Valley Housing Group, Inc., DC Calif.),(Jan. 30, 2012) A federal district court reconsidered its holding that warrants issued by an S corporation s shareholders to be exercised in the event a tax-exempt entity refused to sell donated S corporation stock back to the shareholders constituted as a second class of stock. The court originally granted the government s motion for summary judgment because it found that the warrants constituted a second class of stock under Reg (l)(4)(ii). However, Reg (l)(4)(iii) clearly states that the warrants cannot be treated as a second class of stock if any of the listed safe harbors are satisfied. While the government urged the court to interpret the language of Reg (l)(4)(iii) as applying only to the subsection to which the safe harbor was appended, the language is unambiguous and, therefore, the court concluded that the warrants do not constitute a second class of stock if any of the safe harbors in Reg (l)(4)(iii)(C) apply. Application of the safe harbor depends on whether the warrants strike price was at least 90 percent of the fair market value of the underlying stock on the date the warrants were issued. Since both parties presented substantial evidence as to the fair market value of the shares at the time the warrants were issued, there was sufficient evidence to create a triable issue of fact as to the application of the safe harbor provisions. Therefore, the court modified its order granting the government summary judgment. Granting, in part, a motion for reconsideration of a DC Calif. decision, ustc 50,637. Santa Clara Valley Housing Group, Inc., DC Calif., ustc 50,169