SCOTUS Reports

Tag: new corporation

  • Artukovich v. Commissioner, 61 T.C. 100 (1973): Timeliness of Subchapter S Election for New Corporations

    Artukovich v. Commissioner, 61 T. C. 100 (1973); 1973 U. S. Tax Ct. LEXIS 32

    For a new corporation, the first month of its taxable year begins when it has shareholders, acquires assets, or begins doing business, whichever occurs first, for purposes of making a timely Subchapter S election.

    Summary

    Ron Waller Enterprises, Inc. , a new corporation, attempted to elect Subchapter S status under IRC section 1372(a) on March 25, 1965. The IRS challenged the timeliness of this election, asserting it was filed more than one month after the corporation had acquired assets and begun business operations. The Tax Court held that the election was untimely because the corporation had acquired assets and incurred tax consequences more than one month before filing, thus starting the running of its first taxable year. This case establishes that a new corporation’s Subchapter S election must be made within the first month of its taxable year, which begins when the corporation has shareholders, acquires assets, or starts doing business.

    Facts

    Ron Waller Enterprises, Inc. , was incorporated on December 23, 1964, and planned to operate a restaurant-nightclub. On January 13, 1965, the corporation borrowed $20,000 and opened bank accounts. On February 17, 1965, a lease for the business premises was assigned to the corporation, and before February 26, 1965, it spent over $7,000 on remodeling. The corporation filed its Subchapter S election on March 25, 1965, and opened for business on April 20, 1965. It incurred a net operating loss for its taxable year ending November 30, 1965, which the shareholders, Nick and Stella Artukovich, attempted to claim on their personal tax return.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in the Artukoviches’ 1965 federal income tax, disallowing the deduction of the corporation’s net operating loss due to the untimely Subchapter S election. The Artukoviches petitioned the U. S. Tax Court for a redetermination of the deficiency, arguing that the election was timely made. The Tax Court upheld the Commissioner’s determination, ruling that the election was not timely within the meaning of IRC section 1372(c)(1).

    Issue(s)

    1. Whether the Subchapter S election filed by Ron Waller Enterprises, Inc. , on March 25, 1965, was timely under IRC section 1372(c)(1).

    Holding

    1. No, because the corporation acquired assets and incurred tax consequences more than one month before the election was filed, starting the running of its first taxable year.

    Court’s Reasoning

    The Tax Court applied IRC section 1372(c)(1) and its implementing regulation, section 1. 1372-2(b)(1), which states that the first month of a new corporation’s taxable year begins when it has shareholders, acquires assets, or begins doing business. The court found that the corporation had acquired assets, including a $20,000 loan and a lease, and had incurred tax consequences before February 26, 1965, more than one month before the election was filed. The court rejected the taxpayers’ argument that only “operating assets” trigger the start of the taxable year, holding that any asset acquisition with tax consequences does so. The court emphasized that the regulation’s purpose is to postpone the need for an election until the corporation is no longer a “hollow shell,” which occurred when the corporation engaged in these activities.

    Practical Implications

    This decision clarifies that new corporations must make their Subchapter S election within one month of acquiring assets or incurring tax consequences, not merely from the date of incorporation. Practitioners advising new corporations should ensure that the election is filed promptly after any asset acquisition or business commencement to avoid losing Subchapter S status. This ruling impacts how new businesses structure their initial operations and financing, as any asset acquisition, even if not directly related to the business’s primary operations, can trigger the start of the taxable year. Subsequent cases have followed this ruling, reinforcing the strict interpretation of the timing requirement for Subchapter S elections.

  • General Retail Corp. v. Commissioner, 29 T.C. 632 (1957): Applying Constructive Ownership Rules to Determine “New Corporation” Status for Excess Profits Tax

    <strong><em>General Retail Corporation (Delaware), Petitioner, v. Commissioner of Internal Revenue, Respondent, 29 T.C. 632 (1957)</em></strong>

    The court held that, for excess profits tax purposes, a corporation that acquired assets from its parent company, which had been in business since before 1945, could not be considered a “new corporation” even if the subsidiary commenced its business after that date because the constructive ownership rules of the Internal Revenue Code applied to determine the parent’s stockholders owned the subsidiary’s stock.

    <strong>Summary</strong>

    The United States Tax Court addressed whether General Retail Corporation (Petitioner), formed in 1948 and acquiring assets from General Shoe Corporation (General), qualified for the preferential tax treatment of a “new corporation” under the Excess Profits Tax Act of 1950. The court determined that, under the relevant sections of the Internal Revenue Code, Petitioner was not a new corporation because General commenced its business before 1945. The court found that the constructive ownership rules, which attribute a corporation’s stock to its shareholders, applied. Since General owned all of Petitioner’s stock, and General had been in business since 1925, Petitioner was deemed to have commenced business before 1945, thereby precluding the preferential tax rate.

    <strong>Facts</strong>

    Petitioner was incorporated in Delaware on September 30, 1948, and its fiscal year ended October 31. The incorporators, including individuals who held positions at General Shoe Corporation, elected Petitioner’s initial directors and officers. On October 21, 1948, Petitioner issued 1,000 shares of stock to Sarah A. Jarman, who subsequently transferred the shares to General for $1,000. General Shoe Corporation was the sole shareholder. During November 1948, Petitioner acquired several retail stores from General for book value, and General extended credit to Petitioner. General commenced business in 1925 and continuously engaged in business. Petitioner sought to compute its excess profits tax as a new corporation.

    <strong>Procedural History</strong>

    The Commissioner of Internal Revenue determined a deficiency in Petitioner’s income (excess profits) tax for the fiscal year ending October 31, 1951, disallowing the tax treatment of a new corporation. Petitioner contested the Commissioner’s determination in the United States Tax Court. The Tax Court heard the case and issued a decision in favor of the Commissioner, determining that Petitioner was not entitled to compute its excess profits tax as a new corporation under the Internal Revenue Code.

    <strong>Issue(s)</strong>

    1. Whether Petitioner is entitled to compute its excess profits tax as a new corporation under section 430 (e) (1), I. R. C. 1939.

    <strong>Holding</strong>

    1. No, because the application of the constructive ownership rules of the Internal Revenue Code meant that the corporation was deemed to have commenced business before July 1, 1945, thereby precluding the preferential tax rate.

    <strong>Court’s Reasoning</strong>

    The Tax Court focused on section 430 (e) (1), I. R. C. 1939, which provided preferential tax treatment to new corporations that commenced business after July 1, 1945. However, the court determined that Petitioner acquired a substantial part of its assets from General, which had been in business since 1925. The court stated that to determine whether the corporation qualified under section 430 (e) (1), I. R. C. 1939 it had to also consider section 430 (e), I. R. C. 1939 and section 430 (e) (1), I. R. C. 1939 which invoked section 430 (e). The court stated that Section 445 expressly requires for its application the use of the principle of section 503. The court reasoned that, under section 430 (e) , “the statute says in effect that corporations can qualify under section 430 (e) as having ‘commenced business’ only if they would likewise so qualify as described in section 445.”

    The court applied the principle of constructive ownership of stock outlined in Section 503 of the Internal Revenue Code. This section provided that stock owned by a corporation (General) is considered to be owned proportionately by its shareholders. Since General held all of Petitioner’s stock, the court deemed the stock to be held by General’s shareholders. Because General commenced business before 1945, the court concluded that Petitioner was also deemed to have commenced business before that date, thus disqualifying it from the preferential tax treatment.

    <strong>Practical Implications</strong>

    This case underscores the importance of considering the constructive ownership rules in tax planning, particularly in corporate reorganizations and acquisitions. The ruling highlights that the form of ownership, such as a parent-subsidiary structure, can significantly affect a corporation’s eligibility for tax benefits. Legal practitioners should be mindful of the attribution rules when advising clients on transactions that could trigger the application of such rules. It is essential to scrutinize not only the date of incorporation but also the history and ownership structure of all related entities. Later cases dealing with “new corporation” status will likely cite this case. The case also serves as a reminder that seemingly straightforward statutory interpretations can be complex. Moreover, it emphasizes that the intent of the statute is best determined by the plain language and structure of the code.