Discussion:S-Corporation Tax Planning Issues

The scenario goes: I have a client who is an S-Corporation (has always been and S-Corp) that is in the real estate holdings and investment business. The company has several investment properties, both land and residential property, and some have recently been converted to residential rental property. Most of these properties have appreciated in value, although the housing market has tanked they are still considered to be valued above book value. This client went to an attorney to do some estate planning and the attorney had them form a "family partnership" to hold the S-Corp stock. No stock transfer has taken place to date. Questions: 1. S-Corps can't have partnerships a stockholders correct? The reason I have a problem with this is that the partnership consists of the husband and wife who are treated as one taxpayer and will not file a partnership return so is this technically in violation of the S-Corp rules? 2. If the partnership as a shareholder does violate the S-Corp rules amd the company looses it's S-Corp status how does it affect the appreciated property? I don't deal with many C-Corps and can't seem to find any literature on my particular issue. 3. Does anyone have a better suggestion from a tax/estate planning viewpoint regarding the stock issue? I was wondering why can't the stock be jointly held by husband and wife so it will not enter into the estate at all? Or perhalps convert the S-Corp to an LLC?

Any guidance would be greatly appreciated.

Q2. Basically, the gain on the properties would be double taxed.

Q3. I'm assuming the reason the lawyer wants to do this is to gift the LP interests to beneficiaries at a discount, so what you can do is have voting and non-voting stock of the S corp and them gift the nonvoting to the beneficiaries. Obviously, the nonvoting stock is less valuable and would have a lesser FMV.