1997 Tax Ct. Memo LEXIS 405">*405 An order will be issued denying petitioner's Motion to Dismiss for Lack of Jurisdiction.
MEMORANDUM 1997 Tax Ct. Memo LEXIS 405">*407 OPINION
ARMEN,
On March 26, 1996, respondent issued a Notice of Final S Corporation Administrative Adjustment (FSAA) to the tax matters person (TMP) of Primco Management Company (Primco) determining adjustments to Primco's tax returns for 1990, 1991, and 1992. On June 24, 1996, Julian P. Kornfeld, Esq., filed1997 Tax Ct. Memo LEXIS 405">*408 a petition for readjustment on behalf of Primco contesting the above-described notice. The petition includes allegations that Primco is a small S corporation that is not subject to the unified S corporation audit and litigation procedures.
Respondent filed an answer to the petition denying the allegation that Primco is not subject to the unified S corporation audit and litigation procedures. In particular, respondent alleges that, during the years in issue, Primco's sole shareholders were the Alfred Dreyfus Goldman Revocable Living Trust and the Monty H. Goldman Revocable Living Trust (collectively referred to hereinafter as the trusts). Respondent further contends that the trusts are not "natural persons" within the meaning of section 301.6241-1T(c) (2), Temporary Proced. & Admin. Regs.,
A reply to respondent's answer, filed on behalf of Primco, includes allegations that, because revocable trusts are regarded as a nullity for Federal income tax purposes, it is appropriate to conclude that Primco's sole shareholders1997 Tax Ct. Memo LEXIS 405">*409 are the two individual grantors of the trusts for purposes of determining whether Primco is a small S corporation under the governing regulation. 2
By order dated October 3, 1996, Primco was directed to file an amendment to petition identifying Primco's tax matters person, as well as the name and address of the shareholder commencing the case. 31997 Tax Ct. Memo LEXIS 405">*410 Shortly thereafter, the Court received and filed an amendment to petition, which indicates that Primco's tax matters person (and the shareholder commencing the case) is Alfred D. Goldman. 4 The amendment to petition restates the position that Primco is not subject to the unified S corporation audit and litigation procedures.
Petitioner subsequently filed a Motion to Dismiss for Lack of Jurisdiction consistent with the position outlined above. Respondent filed an objection to petitioner's motion to dismiss.
This matter was called for hearing at the Court's motions session in Washington, D.C., on May 28, 1997. Counsel for the parties appeared at the hearing and presented argument with respect to petitioner's motion.
The issue to be decided is whether the unified S corporation audit and litigation procedures contained in sections 6241-6245 apply to Primco, an S corporation whose sole shareholders during the years in issue were two grantor trusts. If we conclude that the unified procedures do not apply, then the FSAA issued to Primco is invalid, and we must dismiss this case for lack of jurisdiction.
1997 Tax Ct. Memo LEXIS 405">*411 Subchapter D of chapter 63 of subtitle F was codified by section 4(a) of the Subchapter S Revision Act of 1982, Pub. L. 97-354, 96 Stat. 1691-1692. 5 Subchapter D provides that the items of income, loss, deduction, and credit of S corporations generally will be determined in a unified manner at the corporate level as opposed to the individual shareholder level.
Section 6241 provides express authority for the Secretary to prescribe regulations that create exceptions to the unified S corporation audit and litigation procedures. On January 27, 1987, the Secretary promulgated section 301.6241-1T (c) (2), Temporary Proced. & Admin. Regs., (2) * * * * (ii) (iii) (A) A trust; (B) A nominee; or 1997 Tax Ct. Memo LEXIS 405">*413 (C) Other similar pass-through persons through whom other persons have an ownership interest in the stock of the S corporation.
For purposes of the preceding sentence, a shareholder's estate shall not be treated as a pass-through shareholder. [Sec. 301.6241-1T (c) (2) (ii) and (iii), Temporary Proced. & Admin. Regs.,
Petitioner contends that the special rule set forth in section 301.6241-1T (c) (2) (iii), Temporary Proced. & Admin. Regs., does not apply in this case because Primco's sole shareholders during the years in issue were two grantor trusts. Petitioner reasons that, by virtue of the general attributes1997 Tax Ct. Memo LEXIS 405">*414 of a grantor trust, as well as the particular treatment afforded a grantor trust as a permitted shareholder of an S corporation, the deemed owners of the trusts should be considered Primco's shareholders for purposes of applying section 301.6241-1T (c) (2), Temporary Proced. & Admin. Regs. In this regard, petitioner relies primarily upon
1997 Tax Ct. Memo LEXIS 405">*415 We begin our analysis with the observation that
Petitioner's reliance on
Section 301.6241-1T (c) (2), Temporary Proced. & Admin. Regs., plainly states that the small S corporation exception to the unified S corporation audit and litigation procedures only applies to an S corporation with five or fewer shareholders each of whom is a natural person or estate. The small S corporation exception does not apply to an S corporation for a taxable year if any shareholder1997 Tax Ct. Memo LEXIS 405">*417 in the corporation during that taxable year is a pass-through shareholder; i.e., a trust, nominee, or similar pass-through person. Because Primco's sole shareholders during the years in issue were two grantor trusts, we hold that Primco does not qualify under the small S corporation exception to the unified S corporation audit and litigation procedures, section 301.6241-1T (c) (2), Temporary Proced. & Admin. Regs., and, therefore, that the FSAA issued to Primco is valid. Consequently, we shall deny petitioner's Motion to Dismiss for Lack of Jurisdiction.
To reflect the foregoing,
1. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Although the reply filed on behalf of Primco includes allegations that Primco was not owned by the trusts during the years in issue, counsel for petitioner subsequently conceded at the hearing of this matter that Primco was owned by the trusts during the years in issue.↩
3. The pleadings filed in this case on behalf of Primco do not comply with the controlling statutory provisions, which generally require that a petition for readjustment be filed by the tax matters person or a shareholder other than the tax matters person. See secs. 6244 and 6226; Rule 240 (c) (1) (B);
4. Notwithstanding the recitals in the amendment to petition, the Court ultimately changed the caption of this case to read "Primco Management Company, Alfred Dreyfus Goldman Revocable Living Trust, Alfred D. Goldman, Fiduciary, Tax Matters Person, Petitioner v. Commissioner of Internal Revenue, Respondent".↩
5. Subchapter D, consisting of secs. 6241 through 6245, was repealed applicable to tax years beginning after Dec. 31, 1996. Small Business Job Protection Act of 1996, Pub. L. 104-188, sec. 1307 (c) (1), 110 Stat. 1755, 1781.↩
6. (c) Special Rules for Applying Subsection (b).-- * * * * (2) Certain trusts permitted as shareholders.-- (A) In general.--For purposes of subsection (b) (1) (B), the following trusts may be shareholders: (i) A trust all of which is treated (under subpart E of part I of subchapter J of this chapter) as owned by an individual who is a citizen or resident of the United States. * * * * (B) Treatment as shareholders.--For purposes of subsection (b) (1) -- (i) In the case of a trust described in clause (i) of subparagraph (A), the deemed owner shall be treated as the shareholder.↩
