S Corporations, CGES and Sec. 179.

• Author: Zamarra, Randall L.
• Position: Controlled group election statements

Many CPAs believe that controlled group election statements (CGES) should be filed for every S corporation that has more than 50% common ownership with another corporation, to allocate the benefits of Sec. 179. The Sec. 179 regulations provide limits for component members of controlled groups and different limits for S corporations and their shareholders.

When do the various limits apply? This item analyzes these issues and draws some conclusions as to when S corporations should file CGES.

Controlled Group vs. Component Member

A "controlled group" of corporations generally includes those connected through at least 80% common ownership. For Sec. 179 purposes, however, the threshold is only "more than 50 percent." However, a "component member" of a controlled group, as defined in Sec. 1563(b), excludes certain corporations that would otherwise qualify. While S corporations are not listed in Sec. 1563(b)(2) as all excluded member, they are listed in the regulations thereunder as being excluded.

Specifically, Regs. Sec. 1.1563-1(b)(2)(ii) provides that, "[a] corporation which is a member of a controlled group ... shall be treated as an excluded member of such group ... if ... such corporation is ... an electing small business corporation ... not subject to the tax imposed by section 1378." (Emphasis added.) Although Sec. 1378 has been super-seded, the regulation has not been amended to account for the change, which eliminated the tax at the S level on certain capital gains.

Drawing an Analogy

Treasury wrote Regs. Sec. 1.1563-1(b)(2)(ii) so as to include as a component member of a controlled group any S corporation subject to tax under now-superseded Sec. 1378, because that section allowed the benefit of the lower corporate tax brackets and required an allocation of same among the group members. The regulation meshes well with the Code's general theory and construction, so it would seem plausible to draw an analogy between superseded Sec. 1378 and current Sec. 1374, which imposes an S level tax on certain built-in gains (BIGs). Under this analogy, S corporations taxed on BIGs under Sec. 1374 during the current tax year would be treated as component members; hence they should file CGES.

This theory does not hold if one considers that Sec. 1374 does not permit S corporations to use the lower corporate tax brackets to calculate the tax on BIGs. Because the lower brackets were permitted under superseded Sec. 1378, but are not permitted under current...