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S corporation’s taxable year ending with or in the shareholder’s
taxable year. The S corporation’s income is taxable to the
shareholder regardless of whether any income is distributed.
Chen v. Commissioner, supra; Knott v. Commissioner, supra.
Section 1377(a)(1) allocates each item of an S corporation’s
income or loss pro rata on a per share per day of ownership
basis. If a shareholder sells his stock during the S
corporation’s taxable year, he must take into account his pro
rata share of the total amount of the S corporation’s tax items
according to the number of days in that year that he held his
stock, regardless of whether the tax items arose before or after
the sale. Sec. 1377(a)(1). The shareholders may elect to
compute the selling shareholder’s pro rata share of the tax items
as if the S corporation’s taxable year ends on the date the
shareholder’s ownership interest terminates, but the FRC
shareholders did not make such an election. Sec. 1377(a)(2).
It is well settled that beneficial ownership, not legal
title, determines stock ownership for Federal income tax
purposes. Ragghianti v. Commissioner, 71 T.C. 346, 349 (1978),
affd. 652 F.2d 65 (9th Cir. 1981); Pacific Coast Music Jobbers,
Inc. v. Commissioner, 55 T.C. 866, 874 (1971), affd. without
published opinion 457 F.2d 1165 (5th Cir. 1972). Therefore, we
must determine whether Mr. Dunne was the beneficial owner of any
of FRC’s stock during 1997.
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