Problems of shareholders of subchapter S corporations;

              Problems of Shareholders of Subchapter S Corporations
by CHARLES N. WHITEHEAD Partner, San Francisco Office
Presented before the Eighth Annual Institute on Taxation sponsored by the Texas Society of Certified Public Accountants in cooperation with the University of Houston—October 1961
IN 1958 an amendment was made to the Internal Revenue Code de­signed
to cure double taxation in corporate operation as compared with individual or partnership operation, primarily for the benefit of small business. When passed it was hailed as a great bonanza because it permitted corporations operating essentially as partnerships, to avoid corporate tax while still retaining the advantages of corporate organization. Under this section it was hoped that a corporation could be used, with its many operating advantages and with few of the dis­advantages
accruing to the separate character of the corporation and stockholder for tax purposes. This paper is largely a discussion of whether the avowed purpose of the new provision has worked out well, or whether it has added one more complicating factor to an already too complicated Internal Revenue Code.
I recently read that the Treasury had announced some 44,000 corporations had elected, under Subchapter S, to be taxed as partner­ships.
In view of the experiences in our office and of other situations that have come to my attention, I wonder whether 43,999 of these organizations have regretted or will later regret their election. Paren­thetically,
I might add that our office has elected on only two corpora­tions;
both of these were small and both were of the type suited to the Subchapter S election. (This does not include a one-shot election that was terminated the following year.) It is interesting to note that one of them has already achieved the problem status.
I do not propose to review in detail the requirements and the regulations governing Subchapter S corporations. I am sure that all of you are completely familiar with these requirements and need nothing more than a brief and oversimplified resume of the salient points, most of which cover the problems of the shareholders.
As you know, only a restricted class of corporation can qualify for this election. It must have no more than ten stockholders, none of whom can be other than individuals or estates. It must have only one class of stock, it can receive only certain types of income, and it must elect—and each of its shareholders must elect—to be taxed as
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