Ch 22 Flashcards
Chapter definitions for South-Western Federal Taxation 2015: Comprehensive, 38th Edition
Accumulated adjustments account (AAA)
An account that aggregates an S corporations post-1982 income, loss, and deductions for the tax year (including nontaxable income and nondeductible losses and expenses). After the year-end income and expense adjustments are made, the account is reduced by distributions made during the tax year.
Accumulated earnings and profits
Net undistributed tax-basis earnings of a corporation aggregated from March 1, 1913, to the end of the prior tax year. Used to determine the amount of dividend income associated with a distribution to shareholders. See also current earnings and profits and earnings and profits. ? 316 and Reg. ? 1.3162.
Built-in gains tax
A penalty tax designed to discourage a shift of the incidence of taxation on unrealized gains from a C corporation to its shareholders, via an S election. Under this provision, any recognized gain during the first (5, 7, or) 10 years of S status generates a corporate-level tax on a base not to exceed the aggregate untaxed built-in gains brought into the S corporation upon its election from C corporation taxable years.
Bypass election
With shareholder’s consent, an S corporation can elect to have a distribution treated as if it were made from AEP rather than from the AAA. This election may be used as a means to eliminate a small AEP balance.
Other adjustments account (OAA)
An account which includes items that affect basis but not the AAA, such as tax-exempt income and any related nondeductible expenses.
Passive investment income (PII)
Gross receipts from royalties, certain rents, dividends, interest, annuities, and gains from the sale or exchange of stock and securities. When earnings and profits (E & P) also exist, if the passive investment income of an S corporation exceeds 25 percent of the corporation’s gross receipts for three consecutive years, an S election is lost.
Previously taxed income (PTI)
Under prior law, the undistributed taxable income of an S corporation was taxed to the shareholders as of the last day of the corporation’s tax year and usually could be withdrawn by the shareholders without tax consequences at some later point in time. The role of PTI has been taken over by the accumulated adjustments account.
S corporation
The designation for a small business corporation. See also Subchapter S.
Small business corporation
A corporation that satisfies the definition of ? 1361(b), ? 1244(c), or both. Satisfaction of ? 1361(b) permits an S election, and satisfaction of ? 1244(c) enables the shareholders of the corporation to claim an ordinary loss on the worthlessness of stock.
Subchapter S
Sections 13611379 of the Internal Revenue Code. An elective provision permitting certain small business corporations (? 1361) and their shareholders (? 1362) to elect to be treated for income tax purposes in accordance with the operating rules of ?? 13631379. S corporations usually avoid the corporate income tax, and corporate losses can be claimed by the shareholders.
Voluntary revocation
The owners of a majority of shares in an S corporation elect to terminate the S status of the entity, as of a specified date. The day on which the revocation is effective is the first day of the corporation’s C tax year.
