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We hold that a bankruptcy petition filed by an S corporation
does not cause the corporation to cease being a “small business
corporation” or otherwise terminate its status as an S
corporation. The tax treatment of the S corporation is the same
whether or not the entity filed for bankruptcy.9
Petitioner argues that it is unfair to tax him on
passthrough income earned by his solely owned S corporation while
it was in chapter 11 bankruptcy reorganization because he
“received no actual benefit from the use of the property”. We
disagree. Since electing S corporation status, petitioner has
enjoyed passthrough, one-level taxation and corporate liability
protection. V&M Management’s income tax returns show that over
the years petitioner had substantial income from V&M Management
and that the S corporation’s business property was depreciated,
thus reducing the amount of petitioner’s taxable income.
Furthermore, petitioner testified that he was personally liable
for the debts of V&M Management. The proceeds from the sale of
Mandela Apartments reduced V&M Management’s debt liability. See
Schindler v. Walker (In re Harbor Village Dev.), 75 AFTR 2d 95-
508, 95-1 USTC par. 50,032 (Bankr. D. Mass. 1994) (“the income
[while in bankruptcy] will be used to satisfy claims of the
Debtor’s creditors”). Since no separate taxable entity was
9Accord Schindler v. Walker (In re Harbor Village Dev.), 75
AFTR 2d 95-508, 95-1 USTC par. 50,032 (Bankr. D. Mass. 1994)
(partners, and not bankrupt partnership, were liable for taxes
from income generated while partnership in ch. 11 bankruptcy).
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Last modified: May 25, 2011