S Corporations. James, Randolph, and Judith Agley, and Michael ...

[cdr_15]

S Corporations. James, Randolph, and Judith Agley, and Michael and Nancy Timmis were shareholders in F & M Distributors, Inc, Venture Packaging, Inc, and Diamond Automations, Inc James Agley was also a shareholder in Middletown Aerospace. All of the firms were S corporations organized and located in Michigan and doing business in Ohio. None of the shareholders was a resident of Ohio, and none of them personally did business in Ohio. Between 1988 and 1992, the Agleys and the Timmises included their prorated share of the S corporations' income on Ohio personal income tax returns. They believed, however, that out-of-state shareholders should not be taxed in Ohio on the income that they received from an S corporation doing business in Ohio. They contended that the income was earned by the S corporation, not by the shareholders. They also emphasized that none of them personally did business in the state. Finally, they asked the Ohio Tax Commissioner for refunds for those years. Should the state grant their request? Why or why not?

Question 2

If the subject matter of an agency agreement is destroyed, the agency relationship continues until new subject matter is found.
 a. True
  b. False
  Indicate whether the statement is true or false

[matt]

Answer to Question 1

S Corporations
The state tax commissioner refused the request of Agley and the others for refunds, and they appealed to the Ohio Board of Tax Appeals, which in each case affirmed the order denying a refund. They appealed to the Ohio Supreme Court, which affirmed the decision of the state board. The state supreme court explained that the taxpayers' position ignores the flow through' nature of an S corporation, whereby business income generated by the S corporation flows directly through to the shareholder for taxation purposes. As to the claim that they did not personally participate in any business activities in Ohio, the court said that S corporations are pass-through entities for purpose of taxation but are still corporations from a legal perspective. A corporation is an entity separate and apart from the individuals who compose it; it is a legal fiction for the purpose of doing business. Thus, it is S corporations' business activity in Ohio that is dispositive . . . , not the appellants' personal activity. The taxpayers also argued that their share of the S corporations' income was, as to them, nonbusiness income on which they should not have to pay Ohio income tax because they were not Ohio residents. The court responded that this characterization ignores the true nature of the income that appellants receive from their S corporations. . . . The character of the item distributed to a shareholder is to be determined as if the item were realized from the source from which the corporation realized the item. Thus, business income generated by an S corporation retains its status as business income as it passes through to the shareholders.

Answer to Question 2

FALSE