Page 365 - TaxAdviser_2022

S CORPORATIONS

(determined without regard to this not favorable to majority owners (except partnership or other entity), consistent
section). For this purpose, gains or in rare circumstances). The main issues with Regs. Sec. 1.51-1(e)(1)(iii) and Sec.
losses from the sale of capital assets addressed by this section are identify- 51(i)(1)(A).
or assets described in Sec. 1221(a)(2) ing a majority owner and determining Additionally, simply applying the
are not taken into account. whether a majority owner’s (or spouse’s) Secs. 152(d)(2)(A)–(H) rules for pur-
compensation is considered qualified poses of the ERC, the wages paid to em-
However, the newly finalized regula- wages in calculating an ERC. ployees with the following relationships
tions add a new provision: the computa- The IRS began its analysis by noting to a majority owner of a corporation or
tion is to be done without regard to that Section 2301(e) of the CARES partnership are not qualifying wages for
the interest expense limitations of Sec. Act (which created the ERC),45 along purposes of claiming an ERC:
163(j). with Sec. 3134(e), provides rules similar
This election gives tax advisers plan- to those of Sec. 51(i)(1), which pro- (A) A child or a descendant of a child.
ning opportunities. For this purpose, vides that wages paid to certain related (B) A brother, sister, stepbrother, or
profits, no matter how small, are always individuals are not taken into account stepsister.
good, and losses, no matter how small, for purposes of the work opportunity (C) The father or mother, or an ances-
are bad if more than 35% would go to credit. More specifically, Sec. 51(i)(1) tor of either.
limited partners or owners not active and Regs. Sec. 1.51-1(e)(1) provide (D) A stepfather or stepmother.
in management. To the degree one can that wages paid to individuals who bear (E) A son or daughter of a brother or
legitimately time income recognition or any of the following relationships as sister of the taxpayer [i.e., a niece or
expense deductions to result in an entity described in Secs. 152(d)(2)(A)–(H) are nephew].
showing a profit, the cash method, and not considered: (F) A brother or sister of the father or
other methods mentioned, are protected 1. To the taxpayer; or mother of the taxpayer [i.e., an aunt
both for the current year and the follow- 2. If the taxpayer is a corporation, to or uncle].
ing year. an individual who owns, directly or (G) A son-in-law, daughter-in-law,
indirectly, more than 50% in value father-in-law, mother-in-law,
Sec. 3134: Employee retention of the outstanding stock of the brother-in-law, or sister-in-law.
credit for employers subject corporation (majority owner of a (H) An individual (other than a spouse,
to closure due to COVID-19 corporation); or determined without regard to sec-
An extension and modification of the 3. If the taxpayer is an entity other than tion 7703, of the taxpayer) who, for
employee retention credit (ERC) al- a corporation, to any individual who the taxable year of the taxpayer, has
lowed it to be claimed for qualified owns, directly or indirectly, more the same principal place of abode as
wages paid during 2021.43 However, than 50% of the capital and profits the taxpayer and is a member of the
Congress later (and retroactively) termi- interests in the entity (majority owner taxpayer’s household.46
nated the credit a quarter early, making of a noncorporate entity).
it inapplicable to wages paid after Sept. The notice further states that Sec. Caution: While the notice refers to
30, 2021.44 51(i)(1)(A) includes a parenthetical at item (H) above, the statutory language
the end of the subparagraph indicat- of Sec. 51(i)(1)(A) only refers to sub-
ERC wage notice for ing that an individual’s ownership is paragraphs (A) through (G) by reference
S corporation owners determined by applying Sec. 267(c). to Sec. 152(d)(2). Tax advisers finding
On Aug. 4, 2021, the IRS issued Notice Therefore, the IRS concludes that the their clients with this situation may
2021-49 pertaining to the ERC. Sec- rules of that section apply for purposes want to further consider the application
tion IV.D of the notice is guidance that of determining an individual’s ownership of the rules.
affects many closely held family-owned of stock of a corporation (and an indi- Applying a circular analysis of the
businesses; the result of the guidance is vidual’s capital and profits interests in a rules of Secs. 152(d)(2)(A)–(H) coupled

43. American Rescue Plan Act, P.L. 117-2. 45. Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.
44. Infrastructure Investment and Jobs Act, P.L. 117-58, §80604. 46. Sec. 152(d)(2).

34 July 2022 The Tax Adviser