Tax Section – NCBarBlog

An F reorganization, as discussed in The Basics of F Reorganizations, is a tax-free “mere change in identity, form, or place of organization of one corporation, however effected” pursuant to Section 368(a)(1)(F). Although a simple example of an F reorganization is the change of a corporation’s state of incorporation, the broad definition allows for more complex transactions also to qualify as F reorganizations. F reorganizations for S corporations under Rev. Rul. 2008-18 were briefly touched on in Section 453 Trap for S Corporation Asset Sales. That revenue ruling provides guidance on two types of transactions, both of which are F reorganizations.

Situation 1 in Rev. Rul. 2008-18 involves an S corporation, Y, that is 100% owned by one individual, B. In year 1, B contributes all of the stock of Y to Newco in exchange for 100% of Newco’s stock and elects for Y to be a qualified subchapter S subsidiary (a “QSub”, see What is a QSub?), effective immediately upon the transaction.

Situation 2 in Rev. Rul. 2008-18 involves an S corporation, Z, that is 100% owned by one individual, C. In year 1, Z forms Newco, which in turn forms Mergeco. Mergeco merges into Z, with Z surviving and C receiving solely Newco stock in exchange for the Z stock. Newco timely elects for Z to be a QSub.

June 10, 2026/by TAX

Pandemic-Era Federal Tax Refunds: You May be Eligible, but the Deadline is Quickly Approaching

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By Brian C. Bernhardt

A recent case in the Court of Federal Claims confirmed taxpayers may be entitled to refunds of interest and penalties paid during the COVID-19 pandemic if they act before a forthcoming deadline. The National Taxpayer Advocate estimates tens of millions of taxpayers may be entitled to refunds. The opportunity includes a wide variety of penalties and interest, but taxpayers must file a claim for refund by July 10, 2026.

May 27, 2026/by TAX

Qualified Trade or Business Under Section 1202

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By John G. Hodnette Savannah, a white woman with lon gblond hair, wears a pale grey blouse and a black jacket. and Savannah Rankich

The general rules for qualified small business stock (“QSBS”) were discussed previously in “Gain Exclusion for Section 1202 Stock” and updated in “Expanded Benefits for Qualified Small Business Stock Under the OBBB.” For taxpayers to qualify for this gain exclusion, the issuing C corporation must meet the active business requirement, which requires at least 80% of the issuer’s assets be used in the active conduct of one or more qualified trades or businesses. Determining whether a trade or business is qualified can be difficult because there is little guidance from the IRS.

May 18, 2026/by TAX

Section 453 Trap for S Corporation Asset Sales

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By John G. Hodnette

In my prior post, Installment Sale Notes Owned by S Corporations, I discussed sales of S corporation assets in exchange for a promissory note, invoking the installment sale method of Section 453. Buyers commonly use the installment sale method for earnouts, which provide additional contingent consideration based on the performance of the business after the sale. When the S corporation liquidates after closing, distributing closing cash and the earnout right to the S corporation shareholders, the Section 453 rules have an unexpected trap. That often arises where there is a stock sale and Section 338(h)(10) election, which is treated as an asset sale by the S corporation followed by its deemed liquidation. For more on Section 338(h)(10) elections, see my prior blog post Basics of 338(h)(10) Elections.

The Section 453 tax trap is caused by the installment sale rules’ requiring the shareholders to allocate the tax basis of their S corporation stock among the cash distributed and the earnout right, despite the earnout potentially never being paid. That stretching of the basis triggers liquidation gain for the shareholders that would not otherwise exist. If the earnout is never paid, the shareholders recognize a long-term capital loss but are not able to carry the loss back to the liquidation year to offset the liquidation gain. Rather, they can only utilize the capital loss to offset future capital gains. Fortunately, there are a few ways to avoid this tax trap.

April 7, 2026/by TAX

199A Deduction for Real Estate Rental Businesses

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By John G. Hodnette

Section 199A, as discussed in my prior blog post Section 199A Pass-Through Deduction and the Magic Number, provides for a deduction generally equal to the applicable pass-through entity’s qualified business income. However, the deduction is available only for a qualified trade or business, which Section 199A(d)(1) defines as any trade or business other than certain excluded ones. The regulations under Section 199A define trade or business by reference to Section 162, which applies a facts and circumstances approach to determining whether a trade or business exists, including whether the taxpayer is regularly or actively involved in the activity and whether the taxpayer has a profit motive. See Reg. § 1.199A-1(b)(14).

Reg. § 1.199A-1(b)(14) provides a rental business (including renting of real estate) that does not rise to the level of a Section 162 trade or business is nevertheless treated as a trade or business for the purposes of Section 199A if the property is rented to a trade or business conducted by the individual or relevant pass-through entity (an “RPE”) commonly controlled within the meaning of Reg. § 1.199A-1(b)(1)(i). Treas. Reg. § 1.199A-1(b)(10) defines RPE as a partnership or S corporation that is owned directly or indirectly by at least one individual, estate or trust. Accordingly, a passive real estate rental activity operated by a partnership or S corporation that rents the property to another trade or business under common control with such partnership or S corporation may be eligible for the 199A deduction.

March 5, 2026/by TAX

Basics of 338(h)(10) Elections

Tax Section

By John G. Hodnette

Section 338(h)(10) allows a buyer and seller in a qualified stock purchase to elect jointly for the sale of target stock to be treated for tax purposes as a sale of the target’s assets. That is beneficial to the buyer because the transaction is a stock sale for state law purposes (which avoids the need to transfer legal title to assets and the shifting of employees to a new entity) while obtaining a depreciable or amortizable cost basis in the underlying assets. That allows the buyer to depreciate the purchase price over time. The seller often does not prefer a 338(h)(10) election compared to a regular stock sale because the election may result in additional taxes to the seller compared to a regular stock sale. As a result, sometimes the seller will agree to the 338(h)(10) election in exchange for an upward adjustment in the purchase price paid by buyer. Because a 338(h)(10) election is a joint election requiring the consent of both buyer and seller, it cannot be made unless the parties agree.

February 16, 2026/by TAX

Bargain-Sale Pitfalls and the “Eerie Veneer” of NCMA’s “Madonna and Child in a Landscape”

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By Kimberly B. Tyson

On February 18th, the Center for Art Law is sponsoring a lecture by Deborah Gerhard, the Paul B. Eaton Distinguished Professor of Law at UNC School of Law. The topic is the “Madonna and Child in a Landscape,” the famous (and infamous) piece that has adorned the North Carolina Museum of Art for decades. The original owner was an Austrian industrialist who fled Nazi-occupied Vienna in 1938, leaving his art collection with his niece. The Nazis allegedly confiscated the collection. In 1999, his heirs detailed this history to the NCMA. NCMA’s then-curator described the history as adding an “eerie veneer to the painting.” NCMA offered the painting back to the heirs, who reciprocated by selling the painting to NCMA at a price substantially below fair market value (i.e., a bargain sale).

February 11, 2026/by TAX

Substantiating Charitable Giving: Sibling Rivalry?

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By Kimberly B. Tyson

On January 6, 2026, in Gibson v. Commissioner, T.C. Sum. Op. 2026-1 (a nonappealable “S” case), the Tax Court sustained the IRS’s disallowance of a charitable contribution deduction of $188,563 for high-end cycling apparel that taxpayers donated in 2019. The court’s analysis of the appraiser regulation reminded me of Jan Brady, the middle daughter on “The Brady Bunch,” who laments the attention bestowed on Marsha, her older sister.

January 21, 2026/by TAX

Exclusions to the Net Investment Income Tax

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By John G. Hodnette

Since its enactment on March 30, 2010, in connection with the Affordable Care Act, Section 1411 has assessed an additional 3.8% income tax on individuals, estates, and trusts on the lesser of net investment income (“NII”) or the excess of the taxpayer’s modified adjusted gross income over the threshold amount. There are a number of exclusions from the 3.8% tax. Nonresident aliens are not subject to the tax per Section 1411(e)(1). Under Section 1411(e)(2), there is an exemption for charitable trusts that are organized to support religious, charitable, scientific, literary, or educational purposes or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment) or for the prevention of cruelty to children or animals.

NII includes certain gross income or net gain from the disposition of property derived from a trade or business that is a passive activity within the meaning of Section 469 as to the taxpayer or that is trading in financial instruments or commodities (as defined in Section 475(e)(2)). Gross income or net gain from the disposition of property derived from a trade or business in which the taxpayer materially participates (as defined in Section 469) is not NII. Section 1411(c)(4) applies the same reasoning to the disposition of an interest in a partnership or S corporation in which the taxpayer materially participates. Accordingly, the rules of Section 469(h) defining material participation are key in determining whether gain from the sale of a partnership interest or stock in an S corporation is subject to the 3.8% tax.

January 13, 2026/by TAX

Federal Income Tax Update

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By Keith A. Wood

1. Taxpayer Denied a Bad Debt Deduction even though the Borrower had Cancellation of Debt Income; Kelly v. Commissioner, 139 F.4th 854 (9th Cir. 2025).

Between 2007 and 2010, Mr. Kelly loaned millions of dollars to his business entities. In December 2010, Mr. Kelly cancelled a portion of the debts his S corporations owed him. For 2010, Mr. Kelly reported $145 million in cancellation of debt (COD) income passing through his S corporations but excluded that entire amount from taxable income under the Section 108(a)(1)(B) insolvency exception. Mr. Kelly also claimed he was entitled to a nonbusiness bad debt deduction of nearly $87 million since the discharged debt write-off created COD income to his S corporations.

The IRS disallowed the bad debt deduction, arguing Mr. Kelly failed to establish the debts were completely worthless at the end of 2010, regardless of whether Mr. Kelly canceled the S corporations’ debts. Mr. Kelly contended, because the S corporations recognized cancellation of debt income under Section 61(a)(11), he must be entitled to a reciprocal worthless debt deduction under Section 166.

January 8, 2026/by TAX