- 6 - The second issue is how the computation of Company's earnings and profits was affected by its election under subchapter S effective November 1, 1988. Absent the election, Company would have continued to accrue income from its long-term contracts for earnings and profits purposes on the basis of year- end estimates of total contract costs. The earnings and profits available for distribution to petitioners in 1989 would have been determined on the basis of estimated costs to complete contracts in progress on the last day of Company's 1989 taxable year. The result is not the same under subchapter S. The basic purpose of the earnings and profits account is to keep track of the amount of corporate funds that have not yet been taxed to shareholders. When a corporation elects pass-through treatment under subchapter S, its net income earned as an S corporation is taxed currently to the shareholders and thereafter is generally distributed tax-free. Secs. 1366(a), 1368(b)(1), (c)(1). In accordance with the much more limited role of earnings and profits in a pass-through system of taxation, section 1371 provides, for taxable years after 1982, that the accumulated earnings and profits that an S corporation carries over from pre-election years when it was a C corporation, generally are not adjusted for the taxable years during which the election is in effect. Sec. 1371(c)(1); S. Rept 97-640, at 20 (1982), 1982-2 C.B. 718, 720 (accompanying Subchapter S Revision Act of 1982, Pub. L. 97-354, 96 Stat. 1669). While exceptionsPage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 Next
Last modified: May 25, 2011