Shareholders of financially troubled S corporations may now be able to avoid the flow-through of taxes when the S corporation or its subsidiary files bankruptcy.  In In re Majestic Star Casino, LLC, 716 F.3d 736 (3rd Cir. 2013), the Third Circuit Court of Appeals ruled that an S corporation shareholder, who may have received the benefit of years of flow-through income tax treatment from the S corporation, may avoid the flow-through of taxable gain or income in bankruptcy simply by revoking the S corporation election.

The usual Friday release of a large number of letter rulings by the IRS included several rulings of interest on reorganizations and consolidated return issues.

One of the most significant tax provisions contained in the recently enacted American Recovery and Reinvestment Act of 2009 (“ARRA”) might prove helpful to certain taxpayers looking to restructure their balance sheets.

As a general rule, a debtor realizes taxable income upon the partial or total cancellation of its debt. Special rules may apply, however, when the debtor is a “pass-through” entity—e.g., a partnership, a limited liability company (LLC) that is treated as a partnership for United States federal income tax purposes or a subchapter S corporation. Cancellation of debt (COD) income realized by a pass-through entity generally passes through to the entity’s owners, with each owner being required to report its allocable share of such income on its own income tax return.