1. Introduction.
  1. Background and History.
  1. The S corporation provisions were originally adopted in 1958 for the purposes of:
  1. Allowing businesses to select their legal forms free of undue tax influence;
  1. Aiding small businesses by taxing the corporation's income to shareholders (who may be in lower brackets than their corporations); and
  1. Permitting the shareholders to net their corporate losses against income from other sources (S. Rep. No. 1983, 85th Cong., 2d Sess. 87 (1958), 1958-3 C.B. 922).
  1. Other benefits of an S corporation election include:
  1. Exemptions from the accumulated earnings tax of § 531 and the personal holding company tax of § 541;
  1. Avoidance of double taxation as a result of paying dividends to shareholders; and
  1. Substantial reduction of IRS disputes over the reasonableness of compensation.
  1. The subchapter S Revision Act of 1982, ("SSRA") Pub. L. 97-354, October 19, 1982, fundamentally revised the rules applicable to S corporations.
  1. The SSRA was intended to simplify and modify the eligibility requirements as well as the operation of S corporations.
  1. SSRA introduced new terminology.
  1. "S corporation" means a small business corporation for which an election under § 1362(a) is in effect (§ 1361(a)(1)).
  1. "C corporation" means a corporation that does not have an S corporation election in effect for the taxable year (§ 1361(a)(2)).
  1. SSRA applies to tax years beginning after December 31, 1982. In general, SSRA substitutes new §§ 1361-1379 for the old §§ 1371-1379 and adds §§ 6241 through 6245 to Chapter 63.
  1. With the passage of SSRA, S corporations are now treated very similarly to partnerships. Items of income, gain, loss, credit, and deduction are passed-through to the shareholders.
  1. Note, however, that corporate redemptions, liquidations, reorganizations, and other transactions of an S corporation generally continue to be governed by the rules applicable to C corporations (§ 1371(a)).
  1. In addition, S corporations may be subject to a corporate level tax in certain situations. Such taxes include:
  1. § 1374 - Tax on certain net capital gains or certain built-in gains.
  1. § 1375 - Tax on excess net passive income.
  1. § 1371(d) - Business tax credit recapture.
  1. § 1363(d) - LIFO recapture.
  1. If the S corporation election is terminated, the corporate income tax will become fully applicable, including payments of estimated income tax by the corporation (Rev. Rul. 73-25, 1973-1 C.B. 606).
  1. Changes were also made to the S corporation provisions by the Tax Reform Act of 1986 ("TRA 1986") (P.L. 99-5l4, Oct. 22, 1986). Though not as sweeping as the changes made by SSRA, TRA 1986 did have an impact in the areas of the S corporation's choice of taxable year and the taxation of certain built-in capital gains. The Technical and Miscellaneous Revenue Act of 1988 (TAMRA 1988) (P.L. 100-647, Nov. 10, 1988) made additional changes, the most significant of which was in the calculation of the built-in gains tax.