275  7TH Ave  7th floor New York , NY 10001                                                                                                                dcullinanecpa@yahoo.com

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​Daniel Cullinane CPA                                   p 848-250-9587                                                                                                                                     

The average addition to personal debt rung up by those Americans who went into debt this holiday season totaled $1,054, up from $1,003 a year ago and $986 in 2015. To make the new debt even more painful, 2017’s 5% increase was mostly added to high-interest credit card debt.According to researchers at MagnifyMoney, 68% of Americans surveyed added to their credit card debt, up 8% year over year, while 17% of consumers used store credit cards and 9% used a personal loan.The survey also noted that 64% of those who have new holiday debt did not plan for it and that lack of planning could be costly for the half of consumers who don’t plan to pay off the debt within three months.

Almost a third (29%) of those who plan to take more than three months to pay off their purchases say they’ll need at least five months to pay the debt, accruing interest on the debt along the way. Nearly 10% also said they would make only minimum payments on the debt. At a payment rate of $25 a month, it will take these consumers more than five years (63 months) to pay all the principal and interest ($505) on the debt.

Among consumers who took on new debt this year, 56% borrowed $999 or less and 26% ran up bills totaling between $1,000 and $1,999. For the other 18%, here’s the indebtedness breakdown:

$2,000 to $2,999: 9%
$3,000 to $3,999: 3%
$4,000 to $4,999: 1%
$5,000 to $5,999: 4%
$6,000 or more: 1%

Only 12% said they planned to try to consolidate their debt or look for a balance transfer credit card that offered a better rate. Among those who had no plans to seek better terms, 27% said they don’t want to deal with another bank, 20% said there are too many traps, 23% said their loan terms were already low and 8% said they wouldn’t qualify for better terms. Another 10% said they didn’t know enough about making such a change.Nearly half (49%) said the interest rate on their borrowing is less than 10%. One wonders if that includes the so-called deferred interest deals on some store cards. As long as a customer pays on time the interest rate is often 0%. One late or missed payment, however, and the full interest rate kicks in on the full amount of the debt, regardless of how much has already been paid down.


​In the week ended December 29, 2017, the number of rigs drilling for oil in the United States totaled 747, unchanged for the second consecutive week and up by 222 compared with a total of 525 a year ago. Including 182 other rigs drilling for natural gas, there are a total of 929 working rigs in the country, down week over week by two and up by 271 year over year. The data come from the latest Baker Hughes North American Rotary Rig Count released on Friday.

West Texas Intermediate (WTI) crude oil for February delivery settled at $59.84 a barrel on Thursday and traded up about 0.9% Friday afternoon at $60.37 shortly before the close of regular trading.

The natural gas rig count fell by two to 182 this week. The count for natural gas rigs is now up by 50 year over year. Natural gas for February delivery traded up about 1.5% at around $2.96 per million BTUs before the count was released and was essentially unchanged following the report’s release.

In an earlier story today, we noted a report from the Dallas Fed that expected the average price of a barrel of WTI crude to close the year right around $50, even though it is trading around $60 today. If, as seems likely, WTI closes above $60 a barrel, we should expect to see more producers hedging their 2018 production and soaking up some of the speculative long positions that currently outnumber short positions by about nine to one.

Among the states, Colorado and Ohio each added one rig. Texas and North Dakota each lost two rigs this week and Utah lost one.

In the Permian Basin of west Texas and southeastern New Mexico, the rig count now stands at 398, unchanged compared with the previous week’s count. The Eagle Ford Basin in south Texas has 70 rigs in operation, also unchanged week over week, and the Williston Basin (Bakken) in North Dakota and Montana now has 47 working rigs, two fewer for the week.

A binding, nonjudicial settlement agreement, where available under state law, offers a practical alternative to a probate court ruling to revise a trust's terms to comply with requirements to be a qualified Subchapter S trust.
An extension of time to make a "closing of the books" election upon termination of an S election may be available under Regs. Secs. 301.9100-1 and 301.9100-3, a recent IRS letter ruling demonstrates.
If an S corporation has accumulated earnings and profits and excess passive investment income for each of three consecutive tax years, its S election terminates. The IRS waived an inadvertent termination under the facts and circumstances presented in a letter ruling request. Other letter rulings determined that certain rental income was not passive investment income.
The Tax Court ruled in several cases involving S corporation shareholder basis that taxpayers claimed was created or increased by debt obligations. Other court cases involved determining whether the S corporation or its employee-shareholder was required to recognize income from providing services, the effect on basis of shareholders' income inclusion under Sec. 83(b), and allocation to a bankruptcy estate of shareholders' passthrough items.

In 2016 and 2017, courts have decided several cases involving S corporations and their shareholders. In addition, the IRS has issued guidance that should be of interest to S corporation owners. The AICPA S Corporation Taxation Technical Resource Panel offers the following summary of the court decisions and IRS guidance affecting S corporations and their shareholders that the panel believes will be of interest to tax practitioners.

Final regulations under Sec. 385

The IRS and Treasury in 2016 issued proposed regulations under Sec. 385 addressing when a purported debt instrument would be recharacterized as equity for income tax purposes.1 These proposed regulations caused significant concerns from an S corporation perspective because their effect on a corporation's ability to satisfy the small business corporation requirements2 was unclear. Specifically, the proposed regulations raised concerns about whether the recharacterization of a purported debt instrument as equity would cause the issuing corporation to be tr
In two private letter rulings,4 the IRS ruled that a trust was a qualified Subchapter S trust (QSST) following its reformation pursuant to a binding, nonjudicial settlement agreement.

Under the facts of the letter rulings, the terms of a trust that provided for discretionary distributions to the descendants of the primary beneficiary during the primary beneficiary's lifetime were reformed pursuant to a binding, nonjudicial settlement agreement so that the QSST requirement limiting distributions to the current beneficiary during the beneficiary's lifetime would be satisfied.5 Under the laws of the state that governed the trust, interested parties could enter into a binding, nonjudicial settlement agreement with respect to the validity, interpretation, or construction of the terms of the trust that would be final and binding on the trustee, all current and future beneficiaries of the trust, and all other interested persons, as if ordered by a court.

These letter rulings highlight a practical alternative to a probate court ruling for modifying the terms of a trust to qualify it as a permissible S corporation shareholder. However, it is important to note that modifications to a trust, whether via a nonjudicial settlement agreement or a probate court ruling, will likely not be given retroactive effect for purposes of the trust's qualifying as an S corporation shareholder, even if effective retroactively under applicable state law.6

Extension of time granted to file a 'closing of the books' election

If an S election terminates on a date other than the first day of the corporation's tax year, an "S termination year" results, consisting of an "S short year" and a "C short year."7 Unless a closing of the books is required, the corporation's items of income, gain, loss, deduction, credit, etc., are allocated between the S short year and the C short year on a daily, pro rata basis.8 However, a corporation may elect to not have the pro rata allocation rule apply and instead assign the items of income, gain, loss, deduction, credit, etc., for the S termination year to the S short year and the C short year under normal tax accounting rules (the "closing of the books election").9 The election is made by filing a statement with the corporation's return for the C short year.10 In a recent letter ruling,11 the IRS granted the taxpayer an extension of time to file a closing-of-the-books election pursuant to Regs. Secs. 301.9100-1 and 301.9100-3.

Passive investment income (Secs. 1362(d)(3) and 1375)

S election termination from excess passive investment income was inadvertent

Under Sec. 1362(d)(3), if, for three consecutive tax years, an S corporation has accumulated earnings and profits at the close of each tax year and has excess passive investment income12 for each tax year, then the corporation's S election terminates at the beginning the first day of the first tax year following the third consecutive tax year. Under Sec. 1375(a), if an S corporation has accumulated earnings and profits at the close of a tax year and has excess passive investment income for the tax year, a tax is imposed on the corporation's net passive investment income.

In Letter Ruling 201710013, the IRS determined that the termination of the taxpayer's S election under Sec. 1362(d)(3) was inadvertent, even though the taxpayer had paid the tax imposed under Sec. 1375(a) for three consecutive tax years. The taxpayer represented that it was aware that having excess passive investment income could subject it to tax but was unaware that this could cause a termination of its S election. To obtain the ruling, the taxpayer agreed to distribute its accumulated earnings and profits by making a deemed dividend election under Regs. Sec. 1.1368-1(f)(3).

Observation: Note that the deemed dividend election under Regs. Sec. 1.1368-1(f)(3) may be made on a timely filed original or amended return. Thus, provided that the period of limitation on assessment has not closed for the third consecutive tax year in which a taxpayer has accumulated earnings and profits and excess passive investment income, the terminating event may be avoided by making this election on an amended return to distribute all of the corporation's accumulated earnings and profits.

Sharecropping revenue and rental income are not passive investment income

The IRS ruled in Letter Ruling 201722019 that sharecropping revenue and rental income were not considered passive investment income under Sec. 1362(d)(3)(C)(i).

Taxpayer X was engaged in a farming arrangement with another taxpayer for sharecropping purposes whereby direct expenses including processing expenses were allocated based on the percentage of crops to which each was entitled. Taxpayer X paid all utilities, maintenance, box rent, and inspection fees and was responsible for all decisions regarding the type of crops planted and marketing efforts. In a subsequent year, a new lease arrangement was signed, where X's expenses were a percentage of rental income within a fixed range, but all property taxes were to be paid byX.

The IRS held that, based on the facts and representations made, the revenue received under the sharecropping agreement and the rental income under the lease arrangement were not considered passive investment income under the rules in Sec. 1362(d), but the rental activity could still be subject to the passive activity rules of Sec. 469.

Rental income did not constitute passive investment income

The IRS ruled in Letter Ruling 201725022 that rental income received by a corporation intending to be treated as an S corporation did not constitute passive investment income for purposes of Sec. 1362(d)(3)(C)(i).

The taxpayer owned a series of commercial buildings that were leased for medical offices and support activities. The taxpayer contracted with an independent leasing agent to provide assistance with obtaining, negotiating, and renewing leases, which required significant time and attention. The taxpayer had a standard lease agreement with its tenants indicating that the landlord was responsible for maintenance and repair activities, including building systems, lighting, lawn care, walkways, and utilities. Furthermore, the taxpayer represented that these activities were performed daily by the taxpayer, its employees, its agent, and the agent's employees. The IRS ruled that the rental income received from these activities was not passive income for purposes of Sec. 1362 but could still be subject to the passive activity loss rules under Sec. 469.

Shareholder basis
gis,13 the Tax Court ruled that the taxpayer, an S corporation shareholder, failed to establish that he had sufficient basis in S corporation stock and debt to deduct the losses allocated to him from the S corporation. The taxpayer relied on his position as "co-borrower" on notes from outside lenders to the S corporation and notes from related business entities to the S corporation to support his claim of sufficient basis to claim the losses.

The court determined that the loans were made directly between the lenders and the S corporation and that the S corporation was not directly obligated to the shareholder. The court noted that none of the proceeds from the loan agreements were advanced to the shareholder but rather were paid directly to the S corporation. In addition, the shareholder was not called upon to make any payment on the notes as a co-borrower, and he was not looked to by the lenders as the primary obligor on the notes. Without a direct indebtedness from the S corporation to the shareholder, the court declined to recognize basis and disallowed the loss deductions.

The Franklin14 case is similar to Hargis in that the taxpayer was the sole shareholder of an S corporation, and he personally guaranteed the debt of his S corporation to an outside lender. Unlike Hargis, however, the shareholder in Franklin was required to make payment to the lender on the guaranteed debt when the S corporation defaulted. The Tax Court in Franklin accepted evidence that the lender did seize and sell property of the shareholder as payment on the debt of the Scorporation.

The Tax Court acknowledged that the shareholder increased his basis in the S corporation by the amount of the actual payment made under his debt guarantee. The additional basis allowed the shareholder to deduct tax losses allocated to him from the S corporation. However, no deduction was allowed in another year where the shareholder had claimed a loss but the corporation had not filed a return and there was no evidence as to the loss or any basis.

Another debt basis case was Phillips,15 in which a 50% shareholder guaranteed debts of an S corporation. The corporation defaulted on loans, and the creditors sued the guarantors and obtained a judgment against the taxpayer. The taxpayer increased her basis for the amount of the judgments in the year that the courts awarded them to the creditors. However, she had not paid any of the judgments, and the IRS and Tax Court would not allow her to claim basis until she made payments.16

Income earned by shareholder, not S corporation
In Fleischer,17 at issue was whether an S corporation or its shareholder/employee earned income from the services provided by the shareholder/employee.

The taxpayer provided professional services to customers in exchange for commissions and fees that he assigned to his wholly owned S corporation. The taxpayer was then paid a salary from the S corporation, the remaining net income or loss of the corporation was allocated to him, and he received cash distributions.

The Tax Court's opinion in Fleischer notes a first principle of income tax: that "income must be taxed to him who earned it,"18 or, more specifically, to the person "who controls the earning of the income."19 The court noted that for a corporation, and not its service-provider employee, to be the controller of the income, two elements must be found:

The individual providing the services (to the customer) must be an employee of the corporation whom the corporation can direct and control in a meaningful sense; and
There must exist between the corporation and the person or entity using the services (customer) a contract or similar indicium recognizing the corporation's controlling position.

Under the facts of the case, the shareholder, in his personal capacity, entered into a contract with an unrelated party prior to forming the S corporation, and the contract indicated that the shareholder's relationship with the unrelated party was that of an independent contractor. Subsequent to the formation of the S corporation, the shareholder entered into a contract with another unrelated party in his personal capacity. There were no addendums or amendments to either of these contracts requiring the unrelated parties to begin paying the S corporation instead of the shareholder or to recognize the S corporation in any capacity.

The Tax Court held that there was no indicium for the unrelated parties to believe that the S corporation had any control over the shareholder, and therefore, the shareholder, not the S corporation, should have reported the income received under the contracts.

Inclusion of income under Sec. 83(b) creates basis for distribution
Although Austin 20 is probably most notable as an economic substance case, one of its issues involved the taxability of a "special dividend" to an S corporation's shareholders. The Tax Court determined that the S corporation "was always an S corporation" and had no accumulated earnings and profits. Thus, the "special dividend" to its shareholders qualified as a distribution under Sec. 1368(b) and was excluded from the shareholders' taxable income to the extent the distribution did not exceed their stock basis.

The shareholders had relied on certain promissory notes issued as payment for their shares to provide basis and argued that the distribution did not exceed basis. The court found that the notes lacked economic substance and rejected the argument that the shareholders had additional basis. However, as a result of other rulings in the case, the shareholders recognized income under Sec. 83(b) with respect to their shares of the S corporation's stock, increasing their basis in the stock. This increase was sufficient to absorb the distribution so that the distribution was tax-free under Sec. 1368(b).

Bankruptcy estate allocated S corporation income for entire tax year
Under Sec. 1377, generally, an S corporation must allocate its income and other tax items to its shareholders on a per-share/per-day basis. In Medley v. Citizens Southern Bancshares,21 two shareholders in the same S corporation transferred their shares to bankruptcy estates in early 2014. Neither shareholder elected to split his own tax year between the pre- and post-petition period under Sec.1398(d)(2). The corporation was profitable in 2014. The trustee allocated income between the shareholders and the estates based on the number of days each shareholder had held the stock. However, the court determined that Sec. 1398(e)(1) entitled the bankruptcy estate to all of the debtor's income or loss from the bankruptcy date forward. Because income does not pass through from an S corporation to a shareholder until the final day of the corporation's tax year, and the estates were the owners of the stock on that final day, all of the debtors' passthrough items for 2014 would pass through to the estates. The Medley case followed the reasoning in Williams,22 in which a shareholder who had transferred his stock to a bankruptcy estate attempted to benefit from a portion of the S corporation's losses for theyear.

Inadvertent invalid QSub election highlights trap for the unwary
It has become increasingly common for an S corporation to restructure in connection with a sale or a third-party investment. A common form of this restructuring is for the S corporation's shareholders to form a new corporation (Newco), to which the stock of the S corporation (Oldco) is contributed. A qualified Subchapter S subsidiary (QSub) election is then made for Oldco, effective as of the date of contribution. Shortly after the contribution, Oldco is converted to a limited liability company (LLC) under state law. These steps are generally intended to qualify as a reorganization under Sec. 368(a)(1)(F). An unrelated party then purchases interests of the Oldco LLC or invests in it.

In Letter Ruling 201724013, the taxpayer implemented this type of restructuring; however, the QSub election for Oldco was not filed until after Oldco had been converted to an LLC under state law. Because Oldco did not satisfy all of the QSub requirements under Sec. 1361(b)(3)(B) at the time that the QSub election was filed for it, the QSub election was invalid. The IRS granted a waiver of the inadvertent invalid QSub election under Sec.1362(f).  

TEHRAN—Antigovernment demonstrations broke out for a third day across Iran on Saturday, extending some of the country’s most widespread street protests in nearly a decade, but were met by counterprotests from regime supporters for the first time in recent days.

More than 100 people outside the gates of Tehran University were seen chanting slogans including, “Leave Gaza, leave Lebanon, my life for Iran,” a critique of spending on Iranian proxies abroad, and “Death to the dictator!” A few hundred riot police were deployed on nearby roads and blocked access to the university’s main gates.

The antigovernment protesters are frustrated with President Hassan Rouhani’s management of the economy, which has suffered rising prices and high unemployment. Mr. Rouhani helped ease Iran’s economic isolation by presiding over its nuclear deal in 2015, which removed many international sanctions against the country in exchange for curbs on its nuclear program. But many Iranians say that diplomacy, which President Donald Trump fiercely opposed, hasn’t boosted living standards.

Mr. Trump, who has since placed new sanctions on Iran over its ballistic-missile program and opposes the expansion of Iran’s influence in the Middle East, tweeted Friday that the Iranian government should respect its citizens’ right to express themselves. “The world is watching!” Mr. Trump wrote.

Rocky Road
Iran's economy has been growing rapidly since the 2015 nuclear deal brought some sanctions relief, but not fast enough to stem high unemployment exacerbated by stubborn inflation.

Many Iranians also oppose spending on Iranian proxies in Lebanon, Syria and elsewhere because of the high cost while the country faces serious economic crises. Iran is vying to broaden its regional influence in the vacuum left by the defeat of Islamic State in Iraq and Syria, but faces strong opposition from the U.S., Saudi Arabia and other allied nations.

Plainclothes police were seen arresting one man near the Tehran University protests Saturday, although it wasn’t clear if he had taken part in the demonstrations. Police attempted to disperse the crowd using loudspeakers.

Video distributed on social media also appeared to show students at Tehran University shouting slogans against Supreme Leader Ayatollah Ali Khamenei, as security forces stood by. There were reports on social media and from Iranian dissidents about protests in other cities, including Kermanshah in the west and Isfahan in central Iran. The video couldn’t be independently verified, and it was difficult to ascertain how large the protests were.

Tehran University has been a hotbed for protest before, including during the Green Movement unrest in 2009 that challenged the validity of voting results that sent hard-line President Mahmoud Ahmadinejad to a second four-year term. Authorities cracked down hard on that unrest.[Iranian hard-line protesters chant slogans at a rally in Tehran.]
Iranian hard-line protesters chant slogans at a rally in Tehran. PHOTO: EBRAHIM NOROOZI/ASSOCIATED PRESS

Earlier Saturday, thousands of regime supporters flocked to rallies in Tehran and elsewhere to voice their opposition to Green Movement figures, including former presidential candidates Mir Hossein Mousavi and Mehdi Karroubi. Despite being planned well in advance, the annual pro-regime rallies took on new significance as the antigovernment protests spread.

Iranian Foreign Ministry spokesman Bahram Ghasemi dismissed Mr. Trump’s comments as a baseless attempt to interfere in Iran’s affairs, according to the official Islamic Republic News Agency.

Since his election in 2013, Mr. Rouhani has managed to stabilize the currency, lower the inflation rate and spur economic growth. But the financial recovery has been slow for many Iranians who haven’t felt the benefits from the uptick in oil production and exports, and are coping with unemployment of more than 12%.

“Milk is expensive, eggs are expensive, cheese is expensive, many things are not affordable,” said Maryam Miri, an administrative worker in Tehran who voted for Mr. Rouhani. The country needed better management, she said, but added that the president’s hands were tied because ultimate power rested with Mr. Khamenei, who has final say in most matters of state.

“The crisis in society has surged through the roof and people have become rebellious,” she said. “People are saying enough is enough.”

Others saw the protests as instigations by hard-liners who wanted to undermine Mr. Rouhani after their candidate in the May election, Ebrahim Raisi, lost by a wide margin.

“These protests you see are engineered by political groups to undermine Rouhani’s government,” said Reza, a 45-year-old mechanical engineer in Tehran who declined to give his last name. “It’s more an internal political game.