Herbert N. Beller (Professor of Practice, Northwestern; Of Counsel, Eversheds-Sutherland), S Corporations as Shareholders, LLC Members, and Partners, Part 1, 172 Tax Notes Fed. 1713 (Sept. 13, 2021); S Corporations as Shareholders, LLC Members, and Partners, Part 2, 172 Tax Notes Fed. 1915 (Sept. 20, 2021):
This two-part article focuses on numerous transactional scenarios involving S corporations that have sole or partial ownership interests in other entities, including C corporations, qualified S corporation subsidiaries, single- and multiple-member limited liability companiess and partnerships. Part 1 outlines the fundamentals of how subchapter S operates and examines the tax treatment of transactions through which the S corporation comes into existence, other entities become affiliated with the S corporation group, and cash or other property is transferred from an affiliate to the S corporation or to another affiliate. Part 2 examines the tax consequences of transactions in which a complete or partial interest in an affiliate is sold or otherwise disposed of by the S corporation, including through a taxable stock or assets acquisition, a tax-free reorganization under section 368 or a tax-free corporate separation under section 355.
S corporations are certainly familiar creatures in the business world. Despite the TCJA’s substantial reduction of the tax rate on C corporation income, they remain a popular entity choice for tax purposes because of their passthrough single-tax nature, the section 199A deduction, and their having generally less complexity than the subchapter K passthrough regime for partnerships and LLCs. Future changes to the code could, of course, enhance or reduce the appeal of S corporations as an entity choice. In any event, S corporations can take on a chameleon-like quality and become more complicated tax animals when, as is often the case, they conduct some or all of their activities through corporate and/or noncorporate affiliated entities.
As illustrated by the numerous fact patterns discussed in this report, transactions between S corporation affiliates and their S corporation equity owners or outside parties often have collateral tax implications governed by provisions of subchapter C or K, or by the rules regarding disregarded entities. Some of these potential tax implications may be identifiable early on when the choice of entity decision is being made and particular affiliate structures are being considered. Others, however, will come to light only when particular transactions involving affiliates first appear on the radar screen. In either context, tax advisers must carefully analyze all tax consequences that could arise from proposed affiliate transactions or activities — especially their effect on stock basis and the triggering of corporate-level tax on BIGs or excess passive income under section 1374 or 1375. If necessary and feasible, alternative transactional structures should be considered to eliminate or significantly reduce possible tax exposures while still enabling the client to accomplish the desired business objectives in an acceptable manner.