Category: Tax Returns, Examinations & IRS Procedures Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Taxpayer is a shareholder in an S corporation. For the tax year 1993, the shareholder has filed his personal return, but the S corporation has not yet filed Form 1120S. The issue is how long the taxpayer has to file an amended return to take into account the S corporation filing. The threshold issue is whether one looks to the statute of limitations for the S corporation itself or for the shareholder. The answer depends on whether the S corporation Unified Audit Rules apply. TEFRA made certain partnerships subject to partnership level audit rules, with the effect that the statute of limitations with respect to a change in a partnership item is determined with reference to the filing of the partnership return. The S Corporation Revision Act of 1982 applied those same rules to S corporations. In general, if an S corporation has more than five shareholders, the Unified Audit rules apply. If an S corporation has five or fewer shareholders each of whom is either a natural person or an estate, the Unified Audit rules do no apply. Reg. Section 301.6241-1T(c)(2). If the Unified Audit Rules apply, then the taxpayer in this case can amend his return to take into account pass-through items from the S corporation until the corporation statute of limitations runs out. Otherwise, the individual's statute of limitations controls. When does the statute of limitations begin? In general, the statute begins to run on the date the return is filed. Section 6501(a). There is a special rule, however, for returns filed before the regular due date of the return (i.e., the due date without any extensions). These returns are deemed filed on the due date. I assume the taxpayer's 1993 individual return was due April 15, 1994. If he filed before that date, the statute would start running April 15, 1994. If he filed after that date, irrespective of his extension status, the statute would start on the date of actual filing. See IRC Section 6501(b). We did not discuss whether the S corporation in question expects income or loss for 1993; accordingly, I am unsure whether your goal is to make sure the taxpayer gets to enjoy a loss pass-through; or alternatively, you wish to avoid including income from the S corporation. Normally, an S corporation can elect to have the Unified Audit Rules applied even if the rules would not otherwise be applicable due to the five-or-fewer-shareholder rule. Regs. Sections 301.6241-1T(c)(2)(iv) & (v). It would be tempting to make that election if its effect would be to allow the taxpayer to enjoy a loss or some other benefit passed through from the S corporation. However, since the election must be made on a timely filed corporation return, the election appears to be unavailable in this case. Finally, if your goal is to avoid inclusion of income, I would advise extreme caution. Clearly if one manipulates the timing of the S corporation filing in order to avoid inclusion of income at the shareholder level, this is an act that could be viewed very harshly by the Internal Revenue Service and could be incentive for application of the criminal penalties related to willful failure to file. Alternatively, I would assume the 6-year statute effective for substantial omissions of income could be applied if the omission were large enough. See IRC Section 6501(e). Note that the various 1996 tax law changes repealed the Unified Audit Rules for S corporations for years beginning after 12/31/96. P.L. 104-188, Section 1307(c).
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