Current uses of Subchapter S;

              Current Uses of Subchapter S
by H. CLAYTON CHANDLER Partner, Washington Office
Presented before the West Virginia Tax Institute, Charleston — September 1969
FOR A GOOD MANY YEARS the main thing wrong with Subchapter S has been the Internal Revenue Service's interpretation of this section. Of course, this reaction extends to a good many other sections of the Code. When Subchapter S was first introduced into the Internal Reve­nue
Code in 1958, for many taxpayers it appeared to be an ideal solution. They could select whatever form of business organization they desired and hopefully the income tax consequences would be predictable. To me it appears quite clear that this is what Congress intended, but then the IRS started issuing regulations. These regulations created a brier patch for the small-business man. Often he did not have access to com­petent
tax advice, the advice he got often cost him more than he wanted to pay, and the accounting personnel to provide him with the informa­tion
he needed when he needed it was lacking.
REQUIREMENTS FOR SUBCHAPTER S ELECTION
Most of you are certainly familiar with the requirements that must be met in order to make and maintain a valid Subchapter S election, but a brief review may bring things more clearly into focus. A wise man once said, "The easiest way to get into trouble is to be right at the wrong time." This could be particularly true of a Subchapter S election. In brief, then, the requirements for the valid election include: (1) Shareholders must be either individuals (none of whom are nonresident aliens) or estates; (2) shareholders can number no more than ten, each must make a positive election, and the corporation must also make an election; (3) the corporation may have only 20 per cent of its gross receipts in certain types of passive, personal-holding-company type in­come;
(4) there can be only one class of stock; (5) the corporation may not have a subsidiary in which it owns more than 80 per cent of the stock; (6) the corporation may not derive more than 80 per cent of its gross receipts from sources outside the United States. During the period since Subchapter S was first introduced, Congress, by passing
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