- Posts by Larry Brant
PrincipalLarry is Chair of the Foster Garvey Tax & Benefits practice group. He is licensed to practice in Oregon and Washington. Larry's practice focuses on assisting public and private companies, partnerships, and high-net-worth ...
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.
In this Part XIV of my multi-part series on some of the not-so-obvious aspects of Subchapter S, I explore a narrow aspect of Subchapter S that is often ignored or forgotten. An S corporation is not always a mere extension of its shareholders.
Because of the pass-through nature of Subchapter S, taxpayers and their advisers often conclude that an S corporation is a mere extension of its shareholders. That is not always the case. A 2012 decision of the U.S. Tax Court provides a good illustration of this point.
INTRODUCTION
On December 6, 2024, I reported that the U.S. District Court for the Eastern District of Texas, in Texas Top Cop Shop, Inc. et al v. Merrick Garland, Attorney General of the United States et al, issued a 79-page decision, including a preliminary injunction, creating a nationwide prohibition against the government enforcing the Corporate Transparency Act (“CTA”).
As suspected, the government immediately filed an emergency appeal, asking the United States Court of Appeals for the Fifth Circuit (“Fifth Circuit”) to stay the injunction and to hear its arguments in favor of overturning the Texas court’s decision.
2024 is almost at an end. For me, this year went by at lightning speed.
2024 was a wonderful year, full of change and opportunities. I continue to be extremely grateful for the unwavering support of my family, friends, clients and law colleagues!
Mark Twain is accredited with saying:
“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do, so throw off the bowlines, sail away from safe harbor, catch the trade winds in your sails. Explore, Dream, Discover.”
During 2024, I followed Mark Twain’s mantra – I threw off the bowlines and sailed my ship away from the safety of the harbor, catching the trade winds!
I have yet again encountered another important development diverting me from my multi-part blog series on Subchapter S. Earlier this week, the Corporate Transparency Act (“CTA”) hit a massive obstacle. I feel compelled to report about it.
On December 3, 2024, the U.S. District Court for the Eastern District of Texas, in Texas Top Cop Shop, Inc. et al v. Merrick Garland, Attorney General of the United States et al, issued a 79-page decision, including a preliminary injunction, creating a nationwide prohibition against government enforcement of the CTA.
This decision has created a tsunami of banter among members of the legal profession, the media and the business community. While the decision appears to have delivered an early holiday cheer to many, caution is advised. As my late tax professor, James J. Freeland, would have advised his students after reading the decision, pause for cause!
The Wild Journey
I am taking time out from my multi-part series on Subchapter S to report on the Washington capital gains tax. As you know, I have reported in several prior blog posts on the numerous challenges confronting the tax. The long, interesting and turbulent ride of this legislation, however, may be over!
Initiative 2109 was presented to Washington state voters. A “yes” vote for the initiative would repeal the new tax, while a “no” vote would retain the new tax.
On November 5, 2024, the voters spoke loud and clear – they overwhelmingly voted to retain the Washington capital gains tax. A whopping 64.1 percent of the voters (2,341,553 voters) voted “no” on the initiative, while 35.9 percent of the voters (1,312,162 voters) voted “yes.”
Basic Rules
IRC § 6501(a) generally requires the IRS to assess tax within three (3) years after a tax return is filed by the taxpayer.
There are two (2) notable exceptions to this rule under IRC § 6501(c) and (e), namely:
- Under IRC § 6501(c), an unlimited assessment period exists in the case of a false or fraudulent return where the taxpayer has the intent to evade tax; and
- Under IRC § 6501(e), a six (6) year period for assessment exists in the case where the taxpayer understates gross income by more than 25 percent, unless there is adequate disclosure on the taxpayer’s original tax return.
In the case of a shareholder of an S corporation, the analysis is generally conducted at the shareholder level. In other words, the focus is on the shareholder’s tax return, and the issue is whether there is a problem with that return that would extend the limitation period for assessment.
As we know from the basic rules, absent fraud or an undisclosed substantial understatement of gross income, the limitation period for assessment is three (3) years. Likewise, absent fraud, an undisclosed substantial understatement of gross income extends the limitation period for assessment to six (6) years.
The Tax Reform Act of 1986 (the “TRA 86”) was signed into law by President Ronald Reagan on October 22, 1986, exactly 38 years ago today. TRA 86 was sponsored by, among others, Representative Richard Gephardt (D-Missouri) in the U.S. House of Representatives and Senator Bill Bradley (D-New Jersey) in the U.S. Senate. It was strongly supported by the Chairman of the House Ways and Means Committee, Dan Rostenkowski (D-Illinois) and the Chairman of the Senate Finance Committee, Bob Packwood (R-Oregon).
TRA 86 is one of the most comprehensive pieces of tax reform legislation ever enacted in the United States. It was the result of a collaborative effort by Democrats and Republicans that spanned three years.
In this Part XII of my multi-part series on some of the not-so-obvious aspects of S corporations, I explore a consistent theme – taxpayers lose fights with taxing authorities when they fail to maintain adequate records. Keeping adequate records is vitally important to S corporations and their shareholders or, for that matter, all taxpayers.
Background
Time and time again, taxpayers lose their battles with the IRS and other taxing authorities for the same reason – failure to maintain adequate records. One of the greatest services that tax advisers can provide their clients is preaching the virtues of maintaining good records.
RSS Feed
Follow us on Twitter
Follow us on LinkedIn
Larry J. Brant
Editor
Larry J. Brant is a Shareholder and the Chair of the Tax & Benefits practice group at Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; Tulsa, Oklahoma; and Beijing, China. Mr. Brant is licensed to practice in Oregon and Washington. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
