ATTORNEYS RECOMMEND CHANGE IN EFFECTIVE DATE OF PROPOSED S CORP. PROVISION.

We are writing with regard to the Subchapter S simplification provisions of H.R. 11. Section 4604(b) of the bill, as passed by the House of Representatives, would change current law by permitting S corporations to hold subsidiaries. The proposed effective date for the amendment is for taxable years beginning after December 31, 1991.

We assume that the intent behind the above effective date is to allow a corporation that currently has subsidiaries to elect subchapter S status for the current taxable year. However, the bill in its current form may not achieve this result because the deadline for electing S corporation status may have already passed. For example, the deadline for a calendar year corporation to elect S corporation status for the 1992 taxable year expired on March 16, 1992.

To allow the intended beneficiaries of this legislation to be able to elect S corporation status for the current taxable year, the effective date provisions should be changed to add the following provision:

(3) Subchapter S election -- If a corporation becomes a small business corporation (as defined in section 1361(b) of the Internal Revenue Code of 1986) solely as a result of the amendments made by subsection (b), any election under section 1362(a) of such Code made before the close of the 75th day after the date of the enactment of this Act shall be treated as having been made on or before the 15th day of the 3d month of the first taxable year beginning after December 31, 1991.

Such a change would allow corporations to make an S corporation election within 2 1/2 months of the enactment of the bill. If this change is not made, the statute would have the ironic effect of rewarding those taxpayers that made an election without realizing that S corporations may not hold subsidiaries. Taxpayers that complied with the statute would effectively be put at a disadvantage and would have to wait until the next taxable year to elect. If you have any questions please feel free to call Mary Kate Wold at (212) 848-4496 or Lee G. Zimet at (212) 848-5103.

Mary Kate Wold