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S corporation losses can be disallowed as long as shareholder's statute of limitations is still open.

The Fifth Circuit Court of Appeals joined two other circuits in deciding the statute of limitations need be open only for the shareholder, and not for the S corporation, for the IRS to make an assessment based on disallowance of S corporation pass-through losses. In this case, the statute of limitations had run for the S corporations. However, the shareholders had entered into agreements to extend the statute of limitations for the years in question.

Result: For the IRS. Agreeing with the Eleventh Circuit (Fehlhaber) and the Second Circuit (Bufferd), the Fifth Circuit held it is the shareholders' returns, not the corporations', that trigger the running of the statute of limitations. The IRS's assessment therefore was valid. [The Ninth Circuit (Kelley) held the entity's return triggered the running of the statute of limitations .]

* Green et al. (5th Cir., 1992). (The Tax Court's memo decision was named Brody, not Green.)

Note: Under the IRC's unified audit procedures, the IRS has until three years after the S corporation's return is filed to assess. These provisions are generally applicable to S corporations with more than five shareholders. However, the circuit court decisions in this area are still important for S corporations with five or fewer shareholders. The U.S. Supreme Court decided to hear the Bufferd case.
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Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Sep 1, 1992
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