Unclear on Taxability of S Corp Capital Gains

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I look forward to reading the tax articles in The CPA Journal but am often disappointed by what seems like poor editing. The article “Taxability of S Corporation Capital Gains to Part-Year Residents” (State & Local Taxation, January 2004, page 42) was particularly hard to understand. At the beginning the author paraphrases TSB-A-03(1) and refers to MTE Inc. He then refers to MEA, parenthetically, with no explanation of the relation between the two companies, and does not refer to MTE again. The rest of the article deals with MEA, but MTE is the company that is owned by the part-year resident.

After rereading the article I still don’t know what the rule is. When the article states that the gain must be prorated between the periods of residence and nonresidence, does the author mean that if the shareholder was a resident for one month, then 1/12 of the gain is allocated to the resident period and 11/12 to the nonresident period? If so, then what amount is taxable in either period if the investment allocation is zero? The complexity of the calculation begged for an example. The article should also have illustrated the result for the allocation for ordinary business income, a much more common situation, where the S corporation shareholder is a part-year resident.

Bruce G. Pritikin, CPA
New York, N.Y.

Honesty, Integrity, Accuracy

In reading the remarks by former SEC Chairman Arthur Levitt (In Focus, February 2004, page 22), I was struck by a couple of points. Levitt mentioned speaking at the Las Vegas AICPA Council meeting before thousands of accountants. I was present for his talk and there were, at most, 500 accountants. I suggest Mr. Levitt consider that honesty, integrity, and accuracy should begin at home.

He also continued assigning blame (as has Lynn Turner) for the problems of the past few years to multiple groups. As always, he neglects to mention that the group he was head of, which was responsible for being a public watchdog, did not uncover these significant accounting irregularities. The SEC appeared to be asleep at the wheel and did not even review Enron, admittedly a risky, top-five public company, for at least five years prior to its collapse.

It is fair to constantly evaluate how we all can do a better job, but it is, unfortunately, typical of the Levitt team to blame everyone but themselves.

Bill Balhoff
Baton Rouge, La.

Update on Accounting for Stock Options

I was delighted that The CPA Journal published my article “The High-Tech Community Must Surrender on Accounting for Options” (February 2004). This is an area of numerous and rapidly unfolding events, including the adoption of the “fair value” method by the International Accounting Standards Board (IASB) in February.

I should note some events that occurred after I wrote the article: Microsoft (and a number of other major companies, including General Electric, Procter & Gamble, and General Motors) adopted the FASB 123 fair value method in calendar year 2003. Also, I should note that the dollar amounts referred to in the first paragraph of the article were, I believe, calendar year 2002 figures.

Robert I. Schwimmer
Jenkens & Gilchrist
Chicago, Ill.




















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