The tax court has ruled in a case of first impression that because deemed liquidations resulting from a qualified subchapter S subsidiary election are governed by Section 332 of the Internal Revenue Code, no gain or loss could be recognized by shareholders of the S corporation. The trust shareholders had argued that the deemed liquidation resulted in a gain that constituted tax-exempt income under Section 331. The article discusses planning implications for the tax court's decision, advising that S corporations should consider the implications of buying the stock of a corporation and making a QSub election.

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