CF 1992-03 - Application of Ohio Revised Code Section
5733.053 ("Transferor Statute") to the Merger of a C
Corporation into an S Corporation - September 24, 1992
The Department has received several questions regarding the
franchise tax effects of a merger of a C corporation into an
S corporation where prior to the merger the C corporation and
the S corporation were brother-sister corporations owned by
the same individual or family. Specifically, does the income
of the C corporation prior to the merger escape taxation? Or,
instead, does the ORC section 5733.053 transferor statute
apply to the surviving S corporation? That is, must the S
corporation file a franchise report and include on that
report the income of the merged C corporation even though the
S corporation is otherwise exempt from the franchise tax
under ORC section 5733.09(B)?
The Department maintains that the ORC section 5733.053
transferor statute applies to the merger of a C corporation
into an S corporation and that ORC section 5733.09 does not
exempt from the franchise tax the income which is
attributable to the surviving S corporation from a C
corporation. Therefore, an S corporation must file a
franchise report (form FT-1120) and must include on that
report the income of the merged C corporation if on January 1
prior to the merger the two corporations met the ownership or
control requirements of division (A) of ORC section 5733.052
for a combined report (or if on January 1 prior to the merger
the two corporations would have met the ownership or control
requirements of division (A) of ORC section 5733.052 had both
corporations existed on that date). Furthermore, in our view
brother-sister corporations which are owned by the same
individual, family, or estate do meet the ownership
requirement for a combined report set forth in ORC section
5733.052.
ORC section 5733.09(B) provides as follows:
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"A corporation that has made an election under
subchapter S, chapter one, subtitle A, of the
Internal Revenue Code for its taxable year under such
code is exempt from the tax imposed by this chapter
that is based on that taxable year."
ORC section 5733.09(B) does not grant an S Corporation a
blanket exemption from the franchise tax. Rather, a
corporation is exempt from any franchise tax that is
based
on a taxable
year for which the federal S election is in effect.
Conversely, a corporation is not exempt from franchise tax
which is based on a taxable year for which the federal S
election is not in effect.
ORC section 5733.09 does not exempt from the franchise tax
the income earned by a C corporation in a taxable year prior
to its S election because the tax is not based on a taxable
year for which the federal S election is in effect. Likewise,
ORC section 5733.09 does not exempt from the franchise tax
the income earned by a C corporation which is attributed to
an S corporation pursuant to ORC section 5733.053 because the
tax is not based on a taxable year for which the federal S
election is in effect. Rather, the tax is based on the income
earned by a C corporation during the C corporation's
accounting period.ORC section 5733.09(B) exempts corporations
from paying corporate franchise tax for taxable years in
which S corporation income has been recognized for federal
income tax purposes since such income passes through to the
corporations' shareholders and may be subject to the Ohio
personal income tax. C corporation income, on the other hand,
does not pass through, and no franchise tax exemption for
such income is warranted.
ORC section 5733.053 provides in pertinent part:
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(C) For purposes of valuing its issued and
outstanding shares of stock under division (B) of
section 5733.05 of the Revised Code, a taxpayer
subject to this section shall add to its net income
allocated or apportioned to this state, its
transferor's net income allocated or apportioned to
this state. The taxpayer shall add such income in
computing its tax for the same tax year or years that
such income would have been reported by the
transferor if the transfer had not been made and the
transferor had remained subject to the tax imposed by
this chapter on the first day of January of the tax
year.
The taxpayer and the transferor each has its own federal
taxable year, and such years may not coincide. Where there
has been no transfer, ORC section 5733.09(B) exempts an S
corporation from tax measured by income from its own federal
taxable year and from tax on its net
worth at the end of such year. Where there has been
a transfer, ORC section 5733.09(B) likewise exempts an S
corporation from tax measured by income from its own federal
taxable year and from tax on its net worth at the end of such
year. However, ORC section 5733.053 requires an S corporation
to add the C corporation income of its transferor as a
measure of tax, to which ORC section 5733.09 does not apply,
but no net worth addition is required. As a result, the S
corporation has a tax measured solely by the C corporation
income of the transferor.
Similarly, if an S corporation were to transfer assets or
equity to a C corporation and if ORC section 5733.053
applies, ORC section 5733.09(B) would exempt the C
corporation from tax measured by the S corporation (the
transferor) income, leaving the C corporation with tax
measured solely by income from its own taxable year and by
its net worth at the end of such year.
EXAMPLE
Mr. X owns all of the outstanding stock of C Inc., a C
corporation with a fiscal year end of March 31. On December
1, 1991 Mr. X formed S Inc. which immediately elected S
corporation status. S Inc. has a calendar year end. On
December 31, 1991 C Inc. merged into S Inc. with S being the
survivor.
C Inc. is not subject to either the 1992 or the 1993
franchise tax because C Inc. ceased to exist on December 31,
1991. However, S Inc. is subject to both the 1992 and 1993
franchise tax on the income attributed to S Inc. from C Inc.
pursuant to ORC section 5733.053 notwithstanding the fact
that S Inc. is an S corporation and is otherwise exempt from
the franchise tax. S Inc. would have met the ownership or
control requirements of division (A) of ORC section 5733.052
for a combined report with C Inc. if both corporations had
existed on January 1 immediately before and after the merger
and if the merger had not been made (the Department maintains
that brother-sister corporations which are owned by the same
individual or family meet the ownership requirements for a
combined report). S Inc. is subject to the franchise tax on
the income attributed to it from C Inc. because that income
is not based on a taxable year for which the federal S
election is in effect. The income attributed to S Inc. from C
Inc. is based on C's accounting periods 4/1/90 to 3/31/91 and
4/1/91 to 12/31/91 for which no S election was in effect. S
Inc. is subject to the 1992 franchise tax based on the income
earned by C Inc. during the period 4/l/90 to 3/31/91. S Inc.
is subject to the 1993 franchise tax based on the income
earned by C Inc. during the period 4/1/91 to 12/31/91.
Tax Information Releases are not "Opinions of the Tax
Commissioner" within the meaning of ORC section 5703.53,
Accordingly, the Tax Commissioner is not bound by this
release. Nevertheless, the above discussion does reflect the
Income Tax Audit Division's interpretation of the law.
For further assistance please call 614-433-7862.