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using backdated agreements where fees any S corporation determined to be a classified as a syndicate using its current
were retitled as “budget allotments.” In tax shelter. year’s allocations, it can elect to use the
total, these general counsel agreements prior year.42 This election is irrevocable
generated more the $3.5 million. New regulations provide relief but applies only to the year for which
In 2002, Ryder organized an from classification as syndicate the corporation elects.
S corporation with himself as the In 2021, the Treasury finalized several An entity-level profit in the
controlling shareholder to serve as the regulations that could allow some 2021 prior year will also allow an election
employee staffing corporation for his calendar-year partnerships and S corpo- to be made to continue using the
law firm, a C corporation. This new rations to retain the cash method that cash method.
S corporation also had varying levels might otherwise lose it. The regulations
of ESOP ownership over the years. have effective dates for years beginning Example 3: Assume a partnership or
In exchange for a note from himself, after Jan. 5, 2021, but allow the provi- S corporation using the cash method
Ryder would then draw money from sions to be applied to earlier years.40 is profitable in 2020. In 2021, the
various entities he had organized to sell The trap these regulations allow entity has a loss, and more than
his tax-saving products and services. taxpayers to avoid is referred to as the 35% of that loss will be allocable to
After some “unorthodox” journal syndicate rule. This artifact of the anti- limited partners or limited entrepre-
entries, that note was ultimately used to tax shelter rules put in place decades ago neurs. The entity would, under the
pay the S corporation for the services requires any partnership or S corpora- rules in place prior to this change,
Ryder provided to his C corporation tion that allocates more than 35% of be required to change from the cash
law firm. He would then distribute the losses in a year to limited partners or method for 2021. Under the new
note to himself from the S corporation, limited entrepreneurs to change from rule, the entity can elect to use the
claiming sufficient basis for a tax-free the cash method. Limited entrepreneurs 2020 allocations instead of the 2021
distribution. Once his own note was in are those owners not active in manage- allocations. Syndicate status is avoid-
Ryder’s hands, it became null for tax ment. This category includes owners of ed for 2021, and the cash method
purposes. The basis in S corporation voting stock and even members of the can continue to be used.
stock, Ryder claimed, came from other board of directors. For this purpose, the
promissory notes he contributed in actual participation in management, The S corporation must make the
exchange for stock. rather than the ability to do so, governs election on a timely filed return (in-
Using the assignment-of-income the classification. There are rules that cluding extensions) and must state the
doctrine, the Tax Court found that ease this requirement for family-held authority under which it is being made,
income from the staffing and general corporations.41 Regs. Sec. 1.448-2(b)(2)(iii)(B). The
counsel products belonged to Ryder’s An entity classified as a syndicate election is irrevocable.
C corporation law firm and that the loses more than just the ability to use The regulation restates, without
leasing arrangement used for his firm the cash method. Classification as a change, the method for determining
was “nothing more than a mechanism to syndicate also limits the ability of the if a loss exists. The regulation ini-
produce deductions.”39 In dicta, the court entity to use the small business excep- tially provides the same language as the
also noted that Sec. 482 could likewise tion for several other Code provisions prior regulation:
apply and achieve the same result. including the Sec. 163(j)(3) business
interest deduction, the Sec. 460(e)(1)(B) the losses of a partnership, entity, or
Sec. 448: Limitation on use of percentage-of-completion method for enterprise (entities) means the excess
cash method of accounting construction contracts, the Sec. 263A(i) of the deductions allowable to the
Generally, S corporations may use the UNICAP exception, and the Sec. 471(b) entities over the amount of income
cash method of accounting, regardless inventory rules exception. recognized by such entities under
of gross receipts. Sec. 448, however, Under the newly finalized regula- the entities’ method of accounting
denies the use of the cash method for tions, if an S corporation would be used for Federal income tax purposes

39. Ryder, T.C. Memo. 2021-88, at *132. 41. Sec. 1256(e)(3)(C).
40. T.D. 9942 and T.D. 9943. 42. Regs. Sec. 1.448-2(b)(2)(iii)(B).

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