Larry's Tax Law

With the Corporate Transparency Act hopefully in our rearview mirrors, I decided to take a brief break from my ongoing series on Subchapter S and report on a different topic. In the last few weeks, the Magistrate Division of the Oregon Tax Court issued two important decisions,[i] both of which center on a singular issue – whether the taxpayer had engaged in an activity for profit and was thus able to deduct its losses under IRC Section 162.  These battles, commonly referred to as “hobby-loss” cases, have existed among the Internal Revenue Service and/or the state departments of revenue, and taxpayers for decades.  I suspect, with the anticipated significant reduction in staffing at the Internal Revenue Service, we will see more audit activity at the state level throughout the United States.  Among the audit activity may be hobby-loss cases.

In Oregon, the department of revenue (the “ODOR”) has recently made the hobby-loss issue a mainstay in its audits of activities where losses result.  I suspect it is not earth shattering that activities such as horse breeding, racing and training; wineries and vineyards; automobile racing; airplane rentals; and llama breeding and sales have been under fire by the ODOR as hobbies rather than activities engaged in for profit.  Interestingly, the ODOR appears to have added other activities to the list, expanding its hobby-loss exams to include traditional farming and other related activities.

Now that the scurrying around and worrying relative to developments impacting the Corporate Transparency Act (“CTA”) that were coming at us with laser speed are on a slow simmer, I can turn my attention back to my multi-part series on Subchapter S.  Don’t worry, I am not abandoning my coverage of the CTA.  I intend to report any future developments, earth-shattering or otherwise.  

INTRODUCTION

At the most fundamental level, corporations with an election in effect under Code Section 1362 are flowthrough entities.  Items of income, loss, deduction and credit pass through to the shareholders under Code Section 1366 on a pro-rata basis.  Likewise, all operating and liquidating distributions must be made to the shareholders in strict proportion to share ownership.  Unlike Subchapter K, which allows in certain circumstances special allocations of the pass-through items and disproportionate distributions, Subchapter S is not so forgiving. 

These concepts seem mundane.  Unfortunately, in practice, they can sometimes create havoc for the unwary.

In this Part XVI of my multi-part series on some of the not-so-obvious aspects of Subchapter S, I explore how the flowthrough of items of income, loss, deduction and credit are impacted when there are changes in the ownership of an S corporation during the taxable year.

It was about 5:30 p.m. PT last Friday, March 21, 2025, and I was about to sign off from my computer after a long week and turn my attention to college basketball, when I received an email from FinCEN.  The message was that FinCEN had issued an interim final rule relative to the Corporate Transparency Act (“CTA”). 

I am embarrassed to admit that my curiosity got the best of me.  Rather than jump into a weekend of exciting college basketball, I chose to read the 36-page interim final rule (the “IFR”).  Yes, I am a bit consumed with the saga of the CTA.  However, thanks to my cable provider, my DVR had been busy all day recording the games.  So, after scouring the IFR, I was able to enjoy a late night of college hoops.

I was hoping to take a short breather from covering the Corporate Transparency Act (“CTA”). However, I am getting several inquiries from attorneys and business owners, asking if they have missed anything with respect to the CTA and more specifically whether the CTA is dead or alive.  Accordingly, I decided to provide readers with a brief update. 

I apologize in advance if this report creates stress or anxiety.  Unfortunately, this entire ordeal has created unrest for business owners and their advisers.  We continue to hope that the saga will come to an end.

If you feel punch-drunk from the rapid-fire updates to the Corporate Transparency Act (“CTA”), you are not alone.  It is hard to keep up with the madness surrounding this law.

Hoping not to stupefy readers, I will address what I believe is the latest major development in the life of the CTA.  The Treasury made an earth-shattering announcement this past Sunday that can be broken down into the following two bite-size components:

On Thursday, February 27, 2025, FinCEN announced that it will not issue any penalties or pursue enforcement action against reporting companies for the mere failure to meet the current filing deadlines. That news for many is like the title to British songwriter and singer Zoë’s hit song Sunshine on a Rainy Day!

Be aware, this reprieve only lasts until FinCEN issues its interim final rules and they become effective. These rules are expected to be issued on or before March 21, 2025.  Consequently, for those reporting companies that have not registered yet, they need to keep a keen eye on the ball. Alternatively, those companies may want to consider filing before the extended deadline to avoid a foot fault.

I was hoping that I could report to my readers that the turbulent and lengthy ride of the Corporate Transparency Act (“CTA”) was, one way or another, finally over!  Unfortunately, I am unable to deliver that news today.  Instead, I am briefly reporting on the most recent development in the crazy saga.

From previous reporting, you may recall that, on January 23, 2025, the U.S. Supreme Court, in Texas Top Cop Shop, Inc. et al v. Merrick Garland, Attorney General of the United States et al., lifted the Fifth Circuit’s injunction, that was preventing the government from enforcing the CTA.   However, as also reported, the SCOTUS decision had no practical impact on the government’s ability to enforce the CTA because another court (the Eastern District of Texas) in a different case (Smith et. al.  v. U.S. Department of Treasury et. al.) had issued (on January 7, 2025) a nationwide injunction against the government’s enforcement of the CTA.  Accordingly, that court’s injunction, despite the high court’s decision in Texas Top Cop Shot, Inc., remained in place.

In this Part XV of my multi-part series on some of the not-so-obvious aspects of Subchapter S, I explore a potential advantage that the S corporation has over the C corporation.

The Patient Protection and Affordable Care Act, as modified by the Health Care and Education Reconciliation Act of 2010, effective January 1, 2013, imposes a three and eight-tenths percent (3.80%) Medicare tax (the “Net Investment Income Tax” or the “NIIT”) under Code § 1411 on the lesser of:

As I reported yesterday, the U.S. Supreme Court, in Texas Top Cop Shop, Inc. et al v. Merrick Garland, Attorney General of the United States et al., lifted the Fifth Circuit’s injunction, that had been preventing the government from enforcing the Corporate Transparency Act (“CTA”).   However, as reported by Mengqi Sun of The Wall Street Journal, there is another Texas court (the Eastern District of Texas) where the judge issued a nationwide injunction against the government’s enforcement of the CTA and that the injunction remains in place. The Wall Street Journal further reported that there has been no appeal of that decision to a higher court.

I last reported on December 27, 2024, that the Corporate Transparency Act (“CTA”) hit yet another speed bump.  The U.S. Court of Appeals for the Fifth Circuit (“Fifth Circuit”) put the CTA on ice as of December 24, 2024, restraining the government from enforcing the new law while it heard the underlying matter in Texas Top Cop Shop, Inc. et al v. Merrick Garland, Attorney General of the United States et al.

On December 31, 2024, the government petitioned the U.S. Supreme Court (“Supreme Court”), asking it to remove the stay, allowing the government to enforce the CTA pending the outcome of the Fifth Circuit case and the Supreme Court’s decision should it accept a writ of certiorari and ultimately rule on the constitutionality of the CTA.