Chapter 12 Essay

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Research Problem 2

A) Ltr. Rul. 201236018 (9803023) – participant in phantom stock rights plan were not holding a second class of stock. - Company stock compensation with other ways to pay future cash. Many start up companies are so cash starved, they have the perception that use of cash is not a viable alternative

B) Jerome R. Vainisi, 132 T.C. 1 (2008) –
Full amount of interest expense that relates to the bank qualified tax – exemption obligation.

http://www.ustaxcourt.gov/inophistoric/vainisi.tc.wpd.pdf

Ps are shareholders in X, an S corporation. X is the sole shareholder of QSub Bank, a sec. 1361(b)(3)(B), I.R.C., qualified subch. S subsidiary bank. In 2003 and 2004, QSub Bank had interest income relating to qualified tax-exempt obligations (QTEOs). On 2003 and 2004 consolidated Federal income tax returns which included QSub Bank, X deducted the full amount of interest expenses relating to QSub Bank’s QTEOs. Subsequently, R, in notices of deficiency to Ps and, pursuant to sec. 291(a)(3), I.R.C., reduced the 2003 and 2004 interest expense deductions relating to the QTEOs.

C) TAM 200247002 –
IRS says corporations must recognize any deferred intercompany gain immediately before It can be qualified as a subchapter S subsidiary

http://www.irs.gov/pub/irs-wd/0247002.pdf

ISSUES:
1. Whether the deferred gains on the sale of inventory between members of the P group must be included in the P group’s income when P makes an S election for itself and QSub elections for its subsidiaries.
2. If the S election and QSub elections cause the deferred gains to be included in the P group’s income, on what date are the gains triggered, and are the gains treated as built-in gain for purposes of § 1374?
CONCLUSIONS:
1. The deferred gains on the sale of inventory between members of the P group are included in the P group’s income when P makes an S election for itself and QSub elections for its subsidiaries.
2. The deferred gains are included in the P group’s income at the end of Year 1. The gains are not treated as built-in gain for purposes of § 1374.
DISCUSSION:
Section 1361(b)(3) provides that a QSub is not treated as a separate corporation from its S corporation parent, and that all its assets, liabilities, and items of income, deduction, and credit are treated as such items of its S parent. Section 1.1361-4(a) of the Income Tax Regulations further provides that a QSub election is treated as a deemed liquidation of the subsidiary into its S parent. The regulations generally treat this deemed liquidation as occurring at the close of the day before the QSub election is effective.
Section 1361-4(b) provides that if a C corporation elects to be treated as an S corporation and makes a QSub election (effective the same date as the S election) with respect to a subsidiary, the liquidation occurs immediately before the S election becomes effective, while the S electing parent is still a C corporation.

D) Rev. Proc. 97-48, 1997-2 C.B. 521 –
Automatic relief for late S Corp elections

http://www.irs.gov/pub/irs-drop/rp-07-62.pdf

PURPOSE
This revenue procedure provides an additional simplified method for taxpayers to request relief for late S corporation elections and supplements Rev. Proc. 2003-43, 2003-1 C.B. 998. In addition, this revenue procedure provides a simplified method for taxpayers to request relief for a late S corporation election and a late corporate classification election intended to be effective on the same date that the S corporation election was intended to be effective and supplements Rev. Proc. 2004-48, 2004-2, C.B. 172. Generally, this revenue procedure provides that certain eligible entities may be granted relief if the entity satisfies the requirements of sections 4 or 5 (as applicable) of this revenue procedure.

BACKGROUND
.01 S Corporation Elections.
-2-
(1) In General. Section 1361(a)(1) of the Internal Revenue Code (Code) provides that the term "S corporation"
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