- The S corporation provisions were originally adopted in 1958 for the purposes of:
- Allowing businesses to select their legal forms free of undue tax influence;
- Aiding small businesses by taxing the corporation's income to shareholders (who may be in lower brackets than their
- 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).
- Other benefits of an S corporation election include:
- Exemptions from the accumulated earnings tax of § 531 and the personal holding company tax of § 541;
- Avoidance of double taxation as a result of paying dividends to shareholders; and
- Substantial reduction of IRS disputes over the reasonableness of compensation.
- The subchapter S Revision Act of 1982, ("SSRA") Pub. L. 97-354, October 19, 1982, fundamentally revised the rules
applicable to S corporations.
- The SSRA was intended to simplify and modify the eligibility requirements as well as the operation of S
- SSRA introduced new terminology.
- "S corporation" means a small business corporation for which an election under § 1362(a) is in effect (§
- "C corporation" means a corporation that does not have an S corporation election in effect for the taxable year (§
- 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.
- 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.
- 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)).
- In addition, S corporations may be subject to a corporate level tax in certain situations. Such taxes include:
- § 1374 - Tax on certain net capital gains or certain built-in gains.
- § 1375 - Tax on excess net passive income.
- § 1371(d) - Business tax credit recapture.
- § 1363(d) - LIFO recapture.
- 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).
- 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