Business Services Industry
IRS won't give a tax break to owners of ailing S corporations.
Kiplinger Tax Letter, The, January, 2000
IRS won't give a tax break to owners of ailing S corporations. If an S company is insolvent, income from a discharged debt is tax free. But the shareholders cannot increase their tax basis in the S corporation by income excluded this way, the Revenue Service says in new regulations. Means owners can't use the income to deduct more S losses on their 1040s.
However, two courts have ruled to the contrary so far this year. A district court said S owners could use tax-free income to soak up losses suspended from prior tax years. And an Appeals Court said that S owners could use such income to increase their tax basis to claim future losses. Although the cases involved tax years not affected by these regulations, they indicate that the Service's position may not...
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