Article Abstract:
Tax legislation in 1986, 1987, and 1988 included many changes in the requirements for taxable years, particularly for S corporations, partnerships, and personal service corporations. The Internal Revenue Code generally requires taxable years to be based on the computing period or calendar year for which the return is made and requires S corporations and personal service corporations to use the calendar year for tax purposes. Partnerships are required to use the tax year of the owner, unless they have a different fiscal year for an established business purpose. All three can elect a tax year with a deferral of less than three months. IRS rulings have served to excuse late filings for tax year changes due to preparers' errors, negligence, and tardiness, as long as the delay was not due to an action of the taxpayer and as long as the taxpayer exercised due diligence in meeting requirements.
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Article Abstract:
Buy-sell agreements for subchapter S corporations must limit the number and identity of shareholders to preserve the S status and prevent the disposal of stock in a transaction that would terminate S status. Recent changes in tax laws have favored the use of cross-purchase agreements over redemption or equity purchase agreements in buy-sell agreements. An entity buy-sell agreement has negative effects on shareholder basis and the accumulated adjustments account (AAA) of S corporations with previous C corporation earnings and profits. A cross-purchase agreement structures the transaction as an exchange, has no effect on AAA, and preserves the benefits of AAA for shareholders. Cross-purchase agreements also avoid the imposition of the alternative minimum tax on life insurance funded entity redemption buy-sell agreements by transferring ownership of the insurance to the shareholders.
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Article Abstract:
Corporate buy-sell agreements structured as insurance-funded cross-purchases, in which shareholders who are not selling stock buy the stock of those shareholders who are selling, offer taxpayers the advantage of avoiding the corporate alternate minimum tax (AMT) and are more advantageous than redemption agreements. Provisions of the Tax Reform Act of 1986 give C corporation insurance proceeds preferential status when computing AMT because proceeds from a corporate life insurance policy increase book income but not AMT income. Although S corporations are not subject to the AMT, surviving shareholders of S corporations can also maximize their tax advantages through cross purchase agreements by increasing shareholders' stock basis with insurance proceeds.
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