A calendar year corporation has an election under Subchapter S. What will be the

Question

A calendar year corporation has an election under Subchapter S. What will be the effect, if any, of the fllowing event on its S status?

a. The board of directors of the corporation revokes it S election in March of the current year.

b. A shareholder who is a citizen of Mexico and works in San Antonio retire and moves back to Mexico.

c. The corporation acquires an interest in a partnerhip.

d. Because of the death of a shareholder, the total number of shareholders increases from 98 to 101.

e. A shareholder transfers her stock to a newly formed LLC.

Explanation / Answer

A "small business corporation" becomes an "electing small business corporation," so as to bring Subchapter S into play, by filing an election, which is valid only if all shareholders consent. Once made, the election is effective for the taxable year for which it is made and for all succeeding taxable years, unless it is terminated (a) by the failure of a new shareholder to consent to the election, (b) by revocation, . with the consent of all shareholders, (c) by disqualification (e.g., acquisition of stock by a trust, corporation, or other ineligible shareholder, issuance of a second class of stock, etc.), (d) by the corporation's deriving more than eighty percent of its gross receipts from sources outside the United States, or (e) by the corporation's deriving more than twenty percent of its gross receipts from "passive investment income." Once an election has been terminated or revoked, the corporation (and any successor corporation) is ineligible to make another election under Subchapter S for five years, unless the Treasury consents.

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