New S Corporation Case And The Check-The-Box Regulations
September 19, 2020
by Monte A. Jackel
This case came out today. https://www.ustaxcourt.gov/USTCInOp2/OpinionViewer.aspx?ID=12322.
1. It deals with whether a controlling person of a Kentucky not for profit corporation was an S corporation shareholder.
2. I do not disagree with the holding of the court, which seems very apparent; beneficial ownership, a proprietary interest, is necessary to be a shareholder.
3. However, the mode of analysis undertaken by the court is wrong and I don’t want to create confusion for the future. See my LinkedIn post at https://www.linkedin.com/in/monte-jackel-18921024/detail/recent-activity/.
4. The gist of my LinkedIn post, which is consistent with what I have written in the past, is that after 1996 the legal analysis by both the government and the courts should be whether there are “members” or “owners” of the tax entity at issue under the check-the-box regulations.
5. The check-the-box regulations, however, do not define who is a “member” or an “owner”. It should have.
6. The way the regulations are drafted, a reader could easily conclude that the Culbertson analysis for partnerships and the Moline test for corporations is applied before it is determined whether one wants to elect either partnership or association status.
7. Professor Ethan Yale wrote a great article in Tax Notes a decade or so ago on this. https://www.taxnotes.com/tax-notes-today-federal/partnership-taxation/defining-partnership-federal-tax-purposes/2011/05/10/vtxs?highlight=%22ethan%20yale%22. See also McKee treatise at para. 3.03, note 101.2 and https://www.taxnotes.com/tax-notes-today-federal/litigation-and-appeals/castle-harbour-strikes-again/2009/11/02/wx0p.
8. After more than two decades of silence on this issue, can the government amend the check the box regulations to deal with this issue? See attached word document. https://secureservercdn.net/184.108.40.206/wk8.36e.myftpupload.com/wp-content/uploads/2020/09/PROBLEMS-WITH-THE-CHECK-THE-BOX-REGS.docx