Line Items


    Ratings and Stats Don't Mix

  • An IRS panel on the alleged misuse of enforcement statistics found that enforcement results had been used to evaluate officers and set goals for employees. Such performance measurements are a violation of IRS policy. As a result, the service issued reprimands to 12 employees in various management positions. In addition, two staff professionals were admonished and other officials were reassigned.

—Michael Lynch

    Cash Without Dividends

  • Can a corporation sell the stock of an affiliate and distribute the cash without its shareholders' having to report dividends? Yes, if it follows the precedent of a recent private letter ruling in which the IRS said the sale of stock followed by a distribution of the proceeds was a partial liquidation. The corporation and the purchaser of the stock elected to treat the stock sale as an asset sale under section 338(h)(10). Therefore the sale represented the disposition of a qualifying business as required for a partial liquidation. The favorable ruling applied only to the sale proceeds (PLR 9836027).

—Edward Schnee

    Second Class Is Okay

  • One of the disadvantages of conducting business as an S corporation is that section 1361(b)(1)(D) prevents such corporations from having more than one class of stock outstanding. According to a recent letter ruling, however, an S corporation can now have an agreement to redeem a key manager's stock at a favorable price without violating the one-class stock limitation (PLR 9839007).


    Avoid Personal Penalty Tax

  • Closely held service businesses should take steps to avoid the imposition of personal holding company penalty tax. The IRS held that a contract that designated a substitute employee (in case of death, retirement, or disability of the named employer) did not generate personal holding company income. Service corporations concerned about this penalty tax should consider adopting similar contracts (PLR 9820002).


    Changes to W-2 and W-3 Postponed

  • The IRS had announced that Form W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements, would undergo major revisions in 1999. Due to the concerns of several payroll managers, however, the service has since delayed revision until the year 2000. There are some minor changes to the 1999 forms: form W-2, box 12, "Benefits included in box 1," will be optional, but employers must continue to report the lease value of a vehicle provided to an employee either in box 12 or in a separate statement to the employee. In addition, form W-3 will be a single sheet (the second page, "Your copy," has been eliminated).


—Michael Lynch, CPA, Esq.,
is an associate professor of tax accounting at Bryant College,
Smithfield, Rhode Island.
Edward Schnee, CPA, PhD,
is the Joe Lane Professor of Accounting and director,
MTA program, Culverhouse School of Accountancy,
University of Alabama, Tuscaloosa.


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