An S corporation (“S Corp.”) is a small business corporation that is permitted to have its corporate income, losses, deductions, and credits attributed to its shareholders. This appeal arises out of nine consolidated cases before the United States Tax Court regarding the tax implications of an S Corp.’s election to treat its subsidiary as a “qualified subchapter S subsidiary” (“Qsub”) under Internal Revenue Code § 1361. Specifically, the parties disagree as to whether the Qsub election and subsequent sale of the S Corp. parent creates an “item of income” under § 1366(a)(1)(A) thereby requiring the parties who held stock in the parent S Corp. to adjust their bases in stock under § 1367(a)(1)(A). For reasons which follow, we affirm the decision of the Tax Court, finding an increase in stock bases and declared losses to be improper.
In June 1997, ten trusts for the benefit of the Ball family (“Trusts”) acquired direct ownership of all shares of American Insurance Service, Inc. (“AIS”) with an aggregate basis in AIS stock totaling $5,612,555. In 1999, the Trusts formed Wind River Investment Corporation (“Wind River”), a Delaware corporation. The Trusts then contributed their shares in AIS in exchange for all of the shares of Wind River. This resulted in Wind River owning all of the shares of AIS. Effective June 4, 1999, Wind River designated itself a subchapter S Corporation. On February 28, 2003, Wind River elected to treat AIS as a Qsub under § 1361(b)(3). Prior to the Qsub election, the Trusts’ aggregate adjusted basis in the Wind River stock was $15,246,099. Following the Qsub election, the Trusts increased their bases in the Wind River stock from $15,246,099 to a new basis of $242,481,544.
Following the Qsub election and stock basis adjustments, the Trusts sold their interests in Wind River to a third party, Fox Paine, on September 5, 2003. After transaction costs, this sale yielded $230,111,857 in cash and securities in exchange for all of the Wind River stock. Even though they had received $230,111,857 from the sale, the Trusts claimed a loss in the amount of $12,247,229. This was calculated as the difference between the amount actually received for the sale and the new basis in the Wind River stock. The Trusts shareholders’ 2003 tax returns were filed citing the aforementioned capital loss.
Judge(s): Franklin Van Antwerpen
Jurisdiction: U.S. Court of Appeals, Third Circuit
Related Categories: Shareholder , Taxation
|Circuit Court Judge(s)|
|Franklin Van Antwerpen|
|Trial Court Judge(s)|
|Appellant Lawyer(s)||Appellant Law Firm(s)|
|Timothy Lewis||Schnader Harrison Segal & Lewis LLP|
|Nancy Winkelman||Schnader Harrison Segal & Lewis LLP|
|Appellee Lawyer(s)||Appellee Law Firm(s)|
|Richard Farber||U.S. Department of Justice|
|Kathryn Keneally||U.S. Department of Justice|
|Francesca Ugolini||U.S. Department of Justice|