When Subchapter S of the Internal Revenue Code was enacted in 1958, 1 the income tax rates were significantly different than in 2012. In 1958, the top corporate federal income tax rate was 52 percent and the top individual rate was 91 percent. The S corporation concept gained popularity among small businesses and currently ranks as the most popular corporate structure in the United States.

Notwithstanding its popularity, the S corporation concept still embraces problem areas, perhaps the most notable of which is the fact that some S corporations pay unreasonably low salaries, reducing payroll taxes as earnings are removed as corporate distributions rather than wages and salaries.2 Another problem area is the ownership of S corporation stock by other than individuals. This article focuses on one of those problems, the “two-year” rule for S corporation stock ownership by some types of trusts after the death of an individual beneficiary.3



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