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Posts from April 2025.

llamaWith the Corporate Transparency Act hopefully in our rearview mirrors, I decided to take a brief break from my ongoing series on Subchapter S and report on a different topic. In the last few weeks, the Magistrate Division of the Oregon Tax Court issued two important decisions,[i] both of which center on a singular issue – whether the taxpayer had engaged in an activity for profit and was thus able to deduct its losses under IRC Section 162.  These battles, commonly referred to as “hobby-loss” cases, have existed among the Internal Revenue Service and/or the state departments of revenue, and taxpayers for decades.  I suspect, with the anticipated significant reduction in staffing at the Internal Revenue Service, we will see more audit activity at the state level throughout the United States.  Among the audit activity may be hobby-loss cases.

In Oregon, the department of revenue (the “ODOR”) has recently made the hobby-loss issue a mainstay in its audits of activities where losses result.  I suspect it is not earth shattering that activities such as horse breeding, racing and training; wineries and vineyards; automobile racing; airplane rentals; and llama breeding and sales have been under fire by the ODOR as hobbies rather than activities engaged in for profit.  Interestingly, the ODOR appears to have added other activities to the list, expanding its hobby-loss exams to include traditional farming and other related activities.

Now that the scurrying around and worrying relative to developments impacting the Corporate Transparency Act (“CTA”) that were coming at us with laser speed are on a slow simmer, I can turn my attention back to my multi-part series on Subchapter S.  Don’t worry, I am not abandoning my coverage of the CTA.  I intend to report any future developments, earth-shattering or otherwise.  

INTRODUCTION

PuzzleAt the most fundamental level, corporations with an election in effect under Code Section 1362 are flowthrough entities.  Items of income, loss, deduction and credit pass through to the shareholders under Code Section 1366 on a pro-rata basis.  Likewise, all operating and liquidating distributions must be made to the shareholders in strict proportion to share ownership.  Unlike Subchapter K, which allows in certain circumstances special allocations of the pass-through items and disproportionate distributions, Subchapter S is not so forgiving. 

These concepts seem mundane.  Unfortunately, in practice, they can sometimes create havoc for the unwary.

In this Part XVI of my multi-part series on some of the not-so-obvious aspects of Subchapter S, I explore how the flowthrough of items of income, loss, deduction and credit are impacted when there are changes in the ownership of an S corporation during the taxable year.

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Larry J. Brant
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Larry J. Brant is a Shareholder and the Chair of the Tax & Benefits practice group at Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; Tulsa, Oklahoma; and Beijing, China. Mr. Brant is licensed to practice in Oregon and Washington. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.

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