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Ball v Commissioner of Internal Revenue

Case No. 13-2247 (C.A. 3, Feb. 12, 2014)

I. INTRODUCTION



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.

II. FACTS



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)
Kent Jordan
Franklin Van Antwerpen
Thomas Vanaskie

 
Trial Court Judge(s)
Kathleen Kerrigan

 
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

 

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______ generally refers only to the nine appellants. 1366(d)(1). though they had received $230,111,857 from the sale, the specifically, the parties disagree as to whether wl 452722 (2013). as previously noted, the tax court found 1001(a) of the code, which defines ‘[t]he gain [or as r. ball for r. ball iii by filed with the court.” t.c. rule 122(a). shareholder for the shareholder’s taxable year in 17599-11, 17600-11, 17601-11) “the basis of each shareholder’s stock in an s corporation commissioner of internal revenue in this subtitle, gross income means all income from whatever ball jr. childrentrust 1/29/1970; r ball jr. “income” for the trusts. corp. to increase the basis in his or her of the s corp.. see § contracts; pensions; income from discharge of of income” need not qualify as gross income and the 1361, is only covered by § 332 but that other liquidations, commissioner of internal revenue we hold that because the controlling statutes prior to the completion of the transfer of all the (iii) charitable contributions . . . provided in section 1001. section 332 excepts 331, which governs “all other liquidations.” r. ball, 2013 admitted [or] stipulated . . .) may be submitted at any time “section 332 applies only to those cases in property value until the taxpayer ‘realizes’ the gain appeal. excluded from income, and the $100 “suspended” appt; r ball children trust 1/24/1973; russell ball iii, by appt.; r. ball children trust 9/9/1969; ethel ball the commissioner and the trusts differ as to whether analysis of a qsub liquidation at issue here. instead, it $5,612,555, an increase of $227,235,445 results. when this increase their bases in their wind river stock. that gain is not taxable under the non-recognition provision of because the examples of income are expressly provided for 4 or loss. the realization requirement is implicit in § then subject to nonrecognition treatment elsewhere. those percent of the total number of shares of all other period: (a) the items of income described in subparagraph (tax court no. 11-17599) governed by § 61, and includes “[g]ains derived from fact that § 332, by its plain text, applies to a special set of shareholder of an s corporation has zero basis in ball trust, december 22, 1976 v. united states, 2:12-cv-921 election. section 331, governing “gain or loss to shareholders provides for the nonrecognition of gain or loss in 1366(a)(1)(a).” see r. ball, 2013 wl 452722, at *4. lastly, wl 452722, at *9-10. the supreme court in gitlitz, 332 (covering the complete liquidation of a wholly owned gitlitz and farley and determined that “neither case is the property. if the recipient corporation does not an absurdity, but rather a policy choice rightly left to r ball jr. childrentrust 1/29/1970 wl 452722, at *6. the court held that a liquidation cannot the transaction occurs. they support that assertion with 22 in corporate liquidations,” states “[a]mounts received by a 26 u.s.c. § 332. § 332 governs the liquidation of a wholly- and do not create “items of income.” under the internal for the purpose of § 1366. in gitlitz, petitioners were 9/9/1967. the tenth trust has a related case stayed in the as the difference between ‘the amount realized’ 14 the main issue before the tax court and now on _____________ 1 tax court judge: honorable kathleen kerrigan election created an item of income for the parent s corp. r. finding “[that] section [1366] is worded broadly enough to “recognized.” the tax court concluded that “nonrecognition c. gitlitz and farley 26 u.s.c. § 1366(a)(1)(a). ii. facts 26 u.s.c. § 1361(b)(3). a qsub is a wholly owned evidence (as, for example, where sufficient facts have been income under §§ 108(a) and 108(d)(7)(a). id. at 209-10. on 1001(b). own “items of income” argument.25 § 1367. the trusts fail to cite any authority for the (tax court no. 11-17598) recognition provision. section 332 governs “complete (tax court no. 11-17596) formed wind river investment corporation (“wind river”), governs the liquidation of a subsidiary of which the parent place after income has passed through the s income from an interest in an estate or trust. comm’r, 918 f.2d 426, 428 (3d cir. 1990). that is income and some realized gain that, by virtue of § 1366, it is not defined in the internal revenue code and the pennsylvania pending this appeal. see r. ball, jr. for a. l. recognition provision of § 332. id. (“once the amount of the acquiring direct ownership of all ais shares, the trusts had the fair market value of ais’s assets at the time it was commissions, fringe benefits, and similar items; income” for the parent corporation under § 1366(a)(1)(a). the court also noted that the cases have since been of any shareholder . . . . $33,747,858 for the nine trusts that have filed appeals in this 21 requiring the parties who held stock in the parent s corp. to under § 1366 as it relates to §§ 1367, 331, 332, and 61(a). r. stock from $15,246,099 to a new basis of $242,481,544.7 section 7482(a) provides exclusive jurisdiction by this dies, or of a trust or estate which terminates, court seeking a redetermination of deficiencies under the in 1991. 531 u.s. at 208. even after the discharge of corporation.”). be read as closing, not maintaining, a loophole that would section1366(a)(1)(a).” id. at *10. accordingly, the trusts corp.] parent holds 100 percent of the subsidiary’s stock, (2) 2 v. appeal is whether or not a qsub election creates an “item of corporation owns eighty percent or more, applies here, not § 61(a)(3) (“[g]ross income means all income from whatever river stock under § 1367(a)(1)(a). to support their position, defined in § 61(a) and that it is then calculated under § (quoting app. at 24.) the trusts assert that the “crux of the the gain in this case is not recognized due to § 332’s non- 13 liquidation did not give rise to an item the specified amount of such stock on the date of continue qualified with respect to the ownership of recipient corporation must have been the owner of (i) the corporation’s combined net amount of other disposition of [the] property.’” id. (quoting § 1001(a)). r ball for a l ball by appt although statutory text cannot be read in a way that creates the trusts state, “[i]n sum, that realized gain is not under § 61(a) is not present in the “gain” in the appeal before argue that an “item of income” may be defined as gross the regulations further state: r ball for r ball iii by appt; r ball children from the sale or disposition of the property and its deemed i.r.c. § 332[10] securities in exchange for all of the wind river stock.8 $214 million had been realized from the sale of wind river to the trusts position is that this realized but unrecognized gain “controlled subsidiary” into its parent. boris i. bittker & nancy winkelman, esq. [argued] borrows $100 from a third party and loses the river stock to $242,481,544 following the qsub election. the the tax court rejected the trusts’ arguments, relying (2013) after a qsub election, for tax purposes, “the 25 § 1366(a)(1)(a),” would lead to “absurd results” and “open (tax court no. 11-17593) failure to continue qualified occurs at any time the internal revenue service (“irs”) determined the nonrecognition treatment.”). furthermore, the court found, based on percentage of ownership. 4 26 c.f.r. § 1.1366-1(a)(2). trusts should not have increased their bases in the wind prior to shareholders of an insolvent s corporation, which realized the nature of “discharge of indebtedness” as income is not 8 (a) of section 1366(a)(1) . . . .” id. § 1367(a)(1)(a). fox paine. this resulted in a cumulative tax deficiency of qsub are claimed by the trusts to be “items of income” for cited by both parties states that § 332 is an “important provisions prevent realized gain from being included in a treatment of which could affect the liability for tax them, is proof that the sections are not mutually exclusive, absorbed by wind river was $232,848,000 and by unless “excepted by another provision in the tax code.” effective june 4, 1999, wind river designated itself a there was a gain from liquidation (§ 61(a)), that gain was court, finding an increase in stock bases and declared losses gain is not recognized and under the definition of the market value of the property (other than money) received.” 26 owned subsidiary into its parent corporation. “(a) general compensation for services, including fees, “item of income” (§ 1366). (appellant br. at 17.) the trusts distribution.” 26 u.s.c § 332(d)(1)(a). this, according to income under one provision of the code, yet not recognized family (“trusts”)4 claimed from the sale of wind river, and (3) “the qsub 531 u.s. 206 (2001). american insurance service, inc. (“ais”)5 squarely on point.” r. ball, 2013 wl 452722, at *8. the 7 ethel ball for r ball iii apt 2/9/1967 ______ passed through to the taxpayers under § 1366(a)(1)(a). id. at there shall be taken into account the shareholder’s certain specifically described circumstances, by code § 1361.1 § 1.61-6(b)(1). f/b/o r ball iii 12/22/1976; r ball for a l ball by the purpose of § 1366. fundamentally, the trusts claim which the recipient corporation receives at least partial entitled to vote and the owner of at least 80 6 another corporation.” 26 u.s.c. § 332(a) (emphasis added); 202 f.3d 198 (3d cir. 2000). that the code cannot be parsed to create some realized gain corporation of property distributed in complete liquidation of the trusts raised several contentions to the commissioner’s an absurdity, the payment of some taxes and not others is not 210. the petitioners in gitlitz then used the increased bases id. the supreme court in gitlitz acknowledged that all “items r ball children trust 1/24/1973 on appeal from the united states tax court the trusts rely on the holdings of gitlitz and farley, cannot be an “item of income.” commissioner of internal revenue 17 (section 165(d)); soil and water conservation the tax court noted that any conclusion other than a 1.1366-1(a)(2); see also comm’r v. glenshaw glass co., 348 tax court’s error” is its determination that “unrecognized 23 a. items of income stock of the liquidating corporation and if the realized gain has been calculated, the entire amount of the (ii) the corporation’s combined net amount of or not sections 331 and 332 are viewed as separate corporate is considered an “item of income” and they are permitted to to apply only after realization under § 331, without effect on id. at *7. finally, the court distinguished the named trusts are nine of ten total trusts: r. ball for r. commissioner of internal revenue court has defined “gross income” as “accessions to wealth, liabilities, and items of income, deduction, and credit of a 9 percent of the stock of such corporation is held by the s election, the trusts increased their bases in the wind river in determining the tax under this chapter of a commissioner of internal revenue _____________ those cases which meet the statutory requirements. “the amount realized from the sale or other disposition of and this case: gitlitz addressed payments that explicitly were did not result in an “item of income,” the increase in stock 332. as the tax court correctly held, “[a] liquidation cannot 13 treasury regulations provide only guidance.19 v. payment for the stock which it owns in the liquidating b. realization and recognition of gains ______ uses of the tax code loophole.26 for r. ball iii apt. 2/9/1967; ethel ball for a.l. ball as ethel ball for a l ball as appt items of income identified in § 1366(a).” gitlitz, 531 u.s. at 209. v. limited and preferred as to dividends). the thereby 17597-11, 17598-11, realized gain is recognized unless a code section provides for wind river stock following the qsub election and this appeal (tax court no. 11-17597) for s corporation losses suspended under section under the § 61(a) this circuit in farley issued a similar, and even more focuses on “distribution[s] to foreign corporation in complete indebtedness income, the s corp. was still insolvent and so corporation include, but are not limited to, the following stock. the trusts shareholders’ 2003 tax returns were filed majestic star casino, 716 f.3d at 759. section 332 then states be governed by both.” r. ball, 2013 wl 452722, at *6. specifically, the trusts 19 russell ball jr sec first 9/9/1967 pro rata share of the corporation’s— this was except that, in section v of this opinion, our use of the term v. discussion (including tax exempt income)” under § 1366(a)(1)(a), which 24 supreme court is not income, and therefore if not income, for the tax court is correct. the trusts fail to address the whether the gain is an “item of income.” 26 u.s.c. § 331. dominion.” glenshaw glass, 348 u.s. at 431. gains derived and the treatment of gains as income under § 61(a) are property, the provisions for the nonrecognition of separate maintenance payments; annuities; this resulted in wind river owning all of the shares of ais. 3 3 income in determining what constitutes an “item of income” intersecting provisions should be maintained. the tax treatise basis of $242,481,544 is arrived at for wind river. this basis gross income at the time the transaction occurs.”22 v. subsidiary is deemed to have liquidated into the parent under on its own, but for the fact that it has a corporate shareholder, an s corporation (“s corp.”) is a small business and gitlitz v. under another provision, and still remain an “item of income” assistance act of 2002, pub.l. no. 107-147, 116 stat. at 40. property, including those derived under § 331, are not the corporation is in bankruptcy or is insolvent, the be governed by both § 331 and § 332, thereby foreclosing the recognized does not alter the fact that the realized gain is 20 eustice ¶ 10.20. as such, a liquidation is either governed by classes of stock (except nonvoting stock which is permits shareholders to increase their corporate bases by qualified subchapter s subsidiary shall be treated as assets, commissioner of internal revenue overridden by congressional action amending 26 u.s.c. § rents; royalties; dividends; alimony and v. property . . . adjust their bases in stock under § 1367(a)(1)(a).3 realized but unrecognized gain is not taken into account when court over decisions before the united states tax court. our the trusts relied on their assertion that the election “resulted were found deficient for improperly adjusting their bases in include any item of income, even tax-deferred income, that ______ u.s. 426 (1955). “gross income,” however, is defined. it is revenue code unless otherwise noted. river. they further claimed that gains from dealings in more specifically, before the tax court, the trusts 6 indebtedness income was an “item of income” that was (e.d. pa. feb. 22, 2012). for purposes of this appeal, the term income from life insurance and endowment to deduct their total losses. id. the supreme court agreed, 18 arguing that the “realized” liquidation gain the qsub election and subsequent sale of the s corp. parent source derived, including (but not limited to) the following property are expressly included in gross income under § argued: december 17, 2013 ball jr sec first 9/9/1967, following the qsub election and stock basis united states tax court regarding the tax implications of an see also § 337(a) (“no gain or loss shall be recognized to the united states court of appeals v. under the general rule prescribed by section 331 source derived, including . . . [g]ains derived from dealings in corporation.”24 8 18 “any case not requiring a trial for the submission of subsidiary of wind river, ais was also the parent company resulting from the qsub election did not create an item of 5 applicable provision of the internal revenue code in a gain derived from dealings in property and, therefore, the code’s plain text permits the taxpayers here to receive the trusts contend that the tax court “confused the concepts gains and losses from sales or exchanges of items: . . . (3) gains derived from dealings in property. . . .” in contrast, the commissioner claims the gain must realized gain is then unrecognized. another corporation.” id. after joinder of issue (see rule 38) by motion of the parties and then subject to nonrecognition treatment under § 332. 2 25 election to expense certain depreciable business attorneys for appellee i.r.c. §§ 332 and 337.” 26 c.f.r. § 1.1361-4 (2012). thus, the trusts state “[t]his case falls squarely within gitlitz thus allowing the shareholders to take deductions see supra note 17. “as a general matter, the committee 26 c.f.r. § 1.332-1. however, refused to address this policy argument when the both § 332 and § 331. rather, the complexities of this appeal arises out of nine consolidated cases before the “realized” (§ 331) and calculated (§ 1001), and thus is an in sum, the court held that “unrecognized gain section 332 applies.”). i. introduction corporation that is permitted to have its corporate income, v. realized gain becomes an “item of income” by way of § trusts claimed a loss in the amount of $12,247,229.9 corporation to its shareholders (pass through being the internal revenue code 2/9/1967; ethel ball for a l ball as appt; r consolidated and submitted for decision on stipulated facts, _____________ applies to “realize” the gain. the trusts claim the gain is iv. jurisdiction election as an “item of income” under § 1366. 17 11 the increase in stock basis and declared loss to be improper. “[n]o gain or loss shall be recognized on the receipt by a one corporation as a distribution in complete before: jordan, vanaskie, and van antwerpen, in addition the tax court found no cases in which a qsub holding that “unrecognized gain from a qsub election does 12 the qsub election, the trusts’ aggregate adjusted basis in the r ball for r ball iii by appt 24 examples are distinguishable from the gains at issue here reasons which follow, we affirm the decision of the tax loss are totals for all ten trusts. as mentioned above, only (tax court no. 11-17601) it is not one without limits. § 61(a) provides a “broad argued that the deemed liquidation of ais was, under § 331, a supreme court concluded that “income” requires an 26 c.f.r. § 1.332-2(b). 11 12 gains and losses from wagering transactions a necessary prerequisite to “determin[ing] the tax created an item of income under § 61(a).”12 p.o. box 502 is always income, a categorization that does not change if that arguments by asserting that the qsub election did not create (or for the final taxable year of a shareholder who comm’r v. schleier, 515 u.s. 323, 328-29 (1995). the expanded, holding. 202 f.3d at 206. united states department of justice, tax division review of the tax court’s construction of the internal . .” in re majestic star casino, llc, 716 f.3d 736, 743 n.6 result that is consistent with the economics of the the nonrecognition of gain or loss is limited to the third party, fox paine, on september 5, 2003. after 14.) they argue that the tax court reached the reformation by liquidation did not provide an “accession to “accession to wealth.” glenshaw glass, 348 u.s. at 431. the (“the argument ignores the crucial difference between gitlitz incongruous to say that a qsub liquidation, governed by § 5 _____________ revenue code produces an ambiguity, the provision should (vi) each of the corporation’s separate items of _____________ (tax court no. 11-17594) (viii) the corporation’s tax-exempt income. for income), loss, deduction, or credit the separate shareholder's basis in their s corporation stock, “trusts” will include the tenth trust, though not a party, $100 income from the discharge of indebtedness is transactions in that the shareholder has no the treasury regulations further distinguish between entire $100. because the shareholder has no basis and farley.” (reply brief at 9.) rule.--no gain or loss shall be recognized on the receipt by a the stock.” the payment via liquidation is realized and r ball jr. f/b/o r ball iii 12/22/1976 the relevant sections state: “[e]xcept as otherwise provided defers the tax consequences of a gain or loss in subchapter s corporation. on february 28, 2003, wind river ball, 2013 wl 452772, at *4-5 (2013). the tax court held while “item of income” is a broad and undefined term, the actual owner of stock (in the liquidating of income under i.r.c. § 1366(a)(1)(a); therefore, [the somewhat less, being approximately $240,080,978 for the opinion of the court summarily dismiss the effect of non-recognition on whether a revenue code is plenary. nat’l starch & chem. corp. v. opening br. at 42.) rather, the results of gitlitz and farley corporation) possessing at least 80 percent of the united states district court for the eastern district of ______ congress. id. indeed, congress, subsequent to gitlitz, made inherent in this conflict is which statutory provision, 1366(a)(1)(a).18 26 pursuant to § 1367(a)(1)(a), (2) the losses were properly commissioner of internal revenue shall be increased for any period by the sum of the following qsub election did not add wealth, it merely changed the tax in june 1997, ten trusts for the benefit of the ball assets . . . shareholders as an “item of income,” as justification for their new basis and $227,833,750 for the sale proceeds. income that is permanently excludible from gross “recognized,” and thus “not included in or deducted from commissioner,14 income or tax exempt income pursuant to of qsub liquidations under the code. gross income derived from business; interest; appellants assert that the quoted language from 26 c.f.r. the subsidiary is otherwise eligible to qualify as an [s corp.] under tax court rule 122,11 which the taxable year of the s corporation ends the nonrecognition of that gain, it was still “an item of income as previously noted, the main issue before us is v. 61(a). they then contended that, although § 332 provides for received under the plan. §§ 331 or 332, applies to the liquidation of ais via qsub trust 9/9/1969; ethel ball for r ball iii apt subsidiary of a parent s corp., and as such, “all assets, before the end of the corporation’s taxable year), liquidation of an applicable holding company.” id. it is not receipt of such amounts is to be determined as see 26 c.f.r. § 1.1361-4 (providing that a qsub election is a ultimately, the tax court rejected the trusts’ indebtedness in gitlitz still was “income” as included under § from the property obtained by electing and liquidating the iii. tax court proceedings subchapter s subsidiary” (“qsub”) under internal revenue corporation shall be treated as in full payment in exchange for loss] from the sale or other disposition of property’ 26 c.f.r. definition of ‘gross income,’” that is “sweeping [in] scope,” schnader harrison segal & lewis llp “realizing” a gain is enough to create an “item of income” see 26 c.f.r. § . . . . clearly realized, and over which the taxpayers have complete the door to a myriad of abusive transactions.” r. ball, 2013 exception. that subsection, however, does not affect the tax purposes.”16 expenses (section 213) . . . continued so to be at all times until the receipt of for the third circuit for children trust 1/24/1973; russell ball jr. sec. first because, if they were, there would be no need for the stock under i.r.c. [§] 1367(a)(1)(a).” (appendix (“app.”) at v. cottage sav. ass’n v. comm’r, 499 u.s. 554, 559 (1991) treasury regulations, gains from the sale or exchange of liquidating corporation on the distribution to the 80-percent the trusts cited united states v. farley13 26 u.s.c. § 61(a)(3). indebtedness.”20 treatment of the income flowing from the qsub. this 216 (quoting § 1366(a)(1)(a)). the amount received individually by the trusts was divided exception” to the general rule provided in § 331. bittker & under §§ 331 and 61(a)(3), allowed an increase in basis, but of a group of insurance-affiliated corporations. prior to 17 26 u.s.c. § 61(a). of realization and recognition.” (appellants’ opening br. at washington, d.c. 20044 received for the sale and the new basis in the wind river van antwerpen, circuit judge. 7 _____________ losses, deductions, and credits attributed to its shareholders. economic gain or loss from these transactions. deficiency finding: (1) their bases were properly adjusted however, “realized gain from the qsub election was never the new higher bases and resulting tax losses are proper. if it corporation.” id. § (b)(3)(a)(ii). that gain from a qsub election is “realized” and calculated the relevant portion stating: 1001(a). the trusts deem § 332’s non-recognition provision from gross income.” id. therefore, the tax court determined _____________ case. deficiency notices were sent to the trusts on may 18 with an aggregate acquired direct ownership of all shares of its stock of the corporation. the s corporation previously indirectly owned shares in ais. even corporate level. if the $100 debt is forgiven when (vii) any of the corporation’s items of portfolio cannot be deemed an “item of income” under § 1366. in sum, (tax court no. 11-17600) the entire discharge of indebtedness was excluded from gross trusts] could not increase the basis of their [wind river] gain is income; however, this premise is undermined by text of the code was clear. gitlitz, 531 u.s. at 220 (“because gross income; income in respect of a decedent; and 16 no. 107-251, at 52 (2002). congress provides a further treated as in full payment in exchange for stock in purposes of subchapter s, tax-exempt income is under § 1366, that when a gain is unrecognized, it “does not affected by an exclusion elsewhere in the code. see id. here, kathryn keneally, esq. creates an “item of income” under § 1366(a)(1)(a)2 commissioner of internal revenue to illustrate these rules, assume that a sole nine trusts are parties to this suit and, accordingly, the actual for the foregoing reasons, we will affirm the order of the tax court. 16 appeal. recognized, . . . the unrecognized gain did not create an item 15 in complete liquidation of another corporation are 61(a)(3) and the supreme court’s holding in gitlitz. id. § these benefits, we need not address this policy concern.”). 108(d)(7)(a). id. at *8; see also job creation and worker shares in ais in exchange for all of the shares of wind river. wealth” for the corporation and therefore could not create believes that where, as in the case of the present statute under deemed liquidation into the parent corporation); 26 u.s.c. § subtracting the prior aggregate basis of ais stock of increase and its tax consequences are the subject of this expenses (section 179); medical, dental, etc., such other corporation, and gain or loss from the liquidations that are treated under a different statutory scheme income . . . .” (appellant br. at 18.) 21 under § 61(a) and are not analogous to the unique treatment 10 followed. id.. subtracting one from the other yields the loss of $12,247,228. yet it is not “recognized” due to the non- property . . . .”); 531 u.s. at 213. the trusts argue § 331 the value of property, the taxpayer must engage in a ‘sale or appellants alternative. of income under § 61(a)(3),’ or § 1355(a)(1)(a).” (id. at 15 gains and losses from sales or exchanges of capital a delaware corporation. the trusts then contributed their shareholder in a distribution in complete liquidation of a figures for the new basis and stock sale proceeds are trusts’ argument that the gain was first realized under § 331 arguments under § 331, specifically noting that § 332, which the figures stated for the new basis, sale proceeds, and tax the trusts contend, however, regardless of “whether indebtedness income under the theory that the discharge of dealings in property,” as well as “[i]ncome from discharge of ‘could affect the liability for tax of any shareholder.’” id. at § 332(a). the commissioner responded to the trusts’ id. § 61(a)(3), (12). further, the supreme r ball children trust 9/9/1969 9 items determined with respect to that shareholder for such the s corp. shareholders could not increase their bases under liquidations of subsidiaries.” id. § 332 (emphasis added). an irs determined instead that a capital gain of approximately citing the aforementioned capital loss. ball, 2013 wl 452722, at *4. corporation of property distributed in complete liquidation of dispositive. 22 despite use of the term “item of income” in 452722, at *4. if the election resulted in an “item of income,” regulations corresponding to § 61(a).21 owned subsidiary under § 1361(b)(3)(b)(i) (“[one hundred] on the differences between “realization” and “recognition” of total combined voting power of all classes of stock on liquidation of certain holding companies”) provides that wind river stock was $15,246,099. following the qsub increase is added to the prior basis of $15,246,099, a new for the treatment of distributions in liquidation of a no. 13-2247 a373.) the trusts filed petitions with the united states tax “subsection (a) and section 331 shall not apply to such examples of income defined under subsections of § 61(a) but commissioner of internal revenue property shall be the sum of any money received plus the fair precedential the separately stated items [of income] of the s philadelphia, pa 19103 election resulted in an item of income pursuant to [§] 1600 market street, suite 3600 result in an inappropriate reduction of tax liability.” h.r. rep. receipt of such property by a corporation which is items— and 19, 2011, stating “the qsub election and the resulting 26 c.f.r. § 1.332-2(a). section 108, the plain text of a provision of the internal s corp. may elect qsub status for its subsidiary if “(1) the [s “[a] qsub does not even exist for federal tax purposes.” changes to the statute at issue in that case to prevent further under § 61(a) is not recognized nor is it income, and thus it imposed by this chapter for the taxable year of & shareholders ¶ 10.20 (7th ed. 2006). a qsub is a wholly u.s.c. § 1001(b). at this point, the trusts argue that the over two million dollars of discharge of indebtedness income appt.; r. ball jr. f/b/o r. ball iii 12/22/1976; r. ball for a. 61(a)(12). id. at 213. in contrast to gitlitz, a similar inclusion circuit judges. ais is a pennsylvania corporation. although it became a the trusts argue that § 332(d) (“recognition of gain the adoption of the plan of liquidation and have calculated as the difference between the amount actually illustration of why the change, similar to issues presented on court reasoned that gitlitz and farley only established that not constitute an item of income or tax-exempt income under 14 interconnecting these regulations demonstrates that the expenditures (section 175); deduction under an rise to the level of income” and is not an “item of income for corporation, discharge of indebtedness income that from the corporation to the shareholders, § 1367(a)(1)(a) “to prevent double taxation of income upon distribution to be improper. liquidation schemes does not alter the result.” (appellants’ (a) items of income (including tax-exempt whether or not the qsub election created an “item of income.” attorneys for appellants subsidiary). section 332 applies to the liquidation of a and (3) the [s corp.] parent makes the appropriate election . . basis in ais stock totaling $5,612,555. in 1999, the trusts income or loss, and expenses related thereto . . . liabilities, and such items (as the case may be) of the s 20 nonrecognition, is not. according to the trusts, realized gain 26 u.s.c. § 1361. all statutory citations refer to the internal james s. eustice, federal income taxation of corporations the s corp.’s stock by their pro rata share of the discharge of (quoting 26 u.s.c. § 1001(a-b)). “to realize a gain or loss in l. ball by appt.; r ball jr. children trust 1/29/1970; r. ball their tax returns, the gitlitz petitioners increased their bases in applies . . . . an “item of income (including tax exempt income)” under § other gross income measurements are: the general rule in § 331, or it is covered by the exception in § in its stock, the $100 loss is “suspended” at the s corp.’s election to treat its subsidiary as a “qualified loss should be eliminated in order to achieve a tax distributee of any property in a complete liquidation to which (tax court no. 11-17595) allowing a discharge of indebtedness to pass through to 1366(a)(1)(a). indebtedness; distributive share of partnership bases and declared tax losses are improper. ‘adjusted basis.’ revenue code, a qsub election results in a § 332 liquidation. transaction costs, this sale yielded $230,111,857 in cash and first be “recognized” to qualify as an “item of income,” and covered by other sections of the code, may be covered by appt., et al. v. commissioner, 105 t.c.m. (cch) 1257, 2013 19 1.61 -6(b)(1) only addresses issues of timing, namely that gain or loss do not apply to any distribution francesca ugolini, esq. [argued] calculated by adding “any money received plus the fair §§ 331 and 332.23 gitlitz and farley were unpersuasive in qualifying the qsub gain does not rise to the level of income.” (id.) they argue ______ timothy k. lewis, esq. from the general rule property received, under sale or exchange of property creating a realized gain to wind “unprecedented conclusion that because ‘no gain was 10 included explicitly in gross income and was never excluded discharge”), in the case of an insolvent s jurisdiction of §§ 6213(a) and 7442. the cases were richard farber, esq. _____________ r. ball, 2013 wl 15 income in all circumstances in which the the relevant distinguishing language states: corporation, amounts received by one corporation (filed: february 12, 2014) id. included in gross income under § 61(a).”). rather, the “gain” us. see nathel v. comm’r, 615 f.3d 83, 91 (2d cir. 2010) elected to treat ais as a qsub under § 1361(b)(3).6 adjustments, the trusts sold their interests in wind river to a an “item of income” is required for a shareholder of an s under § 1001,15 is excluded from gross income by section 108(a), (tax court nos. 17593-11, 17594-11, 17595-11, 17596-11, taxpayer’s gross income.” r. ball, 2013 wl 452722, at *5. _____________ liquidation of the stock of another corporation and passed through to them and increased their bases in wind clearly provide that tax attribute reduction takes under § 1366, or whether this section requires the gain to be market value of the property (other than money) received.” § id. passes through to the shareholders, increases the 23


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