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der section 707(c) of the Code, if they are made without regard
to the partnership’s income. Like a partner, a 2-percent share-
holder is required by section 61(a) to include the value of such
guaranteed payments in his gross income and is not entitled to
exclude them under the Code sections that otherwise allow the
exclusion of employee fringe benefits. See Rev. Rul. 91-26,
1991-1 C.B. 184.
The only question left, then, is whether Mrs. Hurst is a “2-
percent shareholder.” Section 1372(b) defines the term:
SEC. 1372(b). 2-Percent Shareholder Defined.--For
purposes of this section, the term “2-percent sharehol-
der” means any person who owns (or is considered as
owning within the meaning of section 318) on any day
during the taxable year of the S corporation more than
2 percent of the outstanding stock of such corporation
* * *.
And Mrs. Hurst fits within the definition because through
her husband she was a 100-percent shareholder of HMI for
part of the year; through her son, she was a 51-percent
shareholder for the remainder. Owning, even by attribution,
two percent “on any day during the taxable year of the S
corporation” would have sufficed. Thus, the employer’s cost
of her health insurance is clearly includible in her gross
income.
The Hursts are correct, however, that section 1372
gives Mrs. Hurst a deduction for a percentage of the health
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