- What is the first taxable year for which the corporation may make a new S corporation election?
Answer: 2029
Under IRC §1362(d)(1), the revocation was effective for the 2024 tax year because it was made on or before March 15, 2024. Under IRC §1362(g), a corporation may not make a new S election before the 5th taxable year that begins after the first taxable year for which the termination was effective. Taxable years beginning after 2024 are 2025 (1st), 2026 (2nd), 2027 (3rd), 2028 (4th), and 2029 (5th). Therefore 2029 is the earliest year for a new election. Choice A (2028) is one year too early. Choice C (2030) would be correct only if the corporation also had to wait out the entire fifth year (2029) before re-electing. Choice D (2031) overstates the waiting period further.
- Which prospective transferee would cause Juniper's S election to terminate if the stock were issued to it?
Answer: A revocable trust created by, and treated as owned by, a nonresident alien individual.
Governing authority: IRC §1361(b)(1)(B), IRC §1361(c)(2), and IRC §1361(c)(6). S corporation stock may be owned by individuals who are U.S. citizens or residents, estates, certain trusts, and certain tax-exempt organizations. A grantor trust is eligible only when the deemed owner is a U.S. citizen or resident; the revocable trust owned by a nonresident alien fails that requirement, so Choice D is correct. Choice A is incorrect because an estate is an eligible shareholder. Choice B is incorrect because a disregarded single-member LLC is not the shareholder for federal tax purposes; its U.S. citizen owner is treated as the shareholder. Choice C is incorrect because a §501(c)(3) charitable organization is permitted as an S shareholder under §1361(c)(6).
- Which of the following is correct regarding the timing of an S corporation election?
Answer: A newly formed corporation whose first taxable year begins July 1, 2025, must file Form 2553 no later than September 15, 2025, to make a timely election for its first tax year.
Under IRC § 1362(b)(1) and the Form 2553 instructions, an S election may be made during the tax year immediately preceding the tax year for which it is to be effective or, if made during that tax year, no later than the 15th day of the third month of that tax year. A newly formed corporation has no preceding tax year, so its timely first-year election must be made by the 15th day of the third month of its first tax year. For a first tax year beginning July 1, 2025, that deadline is September 15, 2025, so Choice B is correct. Choice A is incorrect because an existing calendar-year corporation that files after March 15, 2025, has missed the statutory current-year election deadline; later filing is not made 'timely' by shareholder consent or lack of business operations. Choice C is incorrect because the current-year election deadline is not the return due date (including extensions). Choice D is incorrect because an election filed during the preceding tax year takes effect for the following tax year, not the preceding year.
- For purposes of the 100-shareholder limit, how many shareholders does the corporation have?
Answer: 100
IRC §1361(b)(1)(A) limits an S corporation to 100 shareholders, and the counting rules in IRC §1361(c) apply. Because the facts state that all individuals described are unrelated except the married couple, the family aggregation rule in IRC §1361(c)(1) does not reduce the count beyond the spousal rule. A husband and wife are treated as one shareholder, so the married couple count as 1. A grantor trust is not counted separately; its owner is the shareholder, and that owner is already included among the 96. The current beneficiary of a QSST is counted as the shareholder, and each potential current beneficiary of an ESBT is counted. Thus the count is 96 + 1 + 0 + 1 + 2 = 100. Choice A (97) omits the QSST beneficiary and the two ESBT beneficiaries. Choice B (98) counts the QSST beneficiary but omits the two ESBT beneficiaries. Choice C (99) counts the ESBT as one shareholder rather than counting its two potential current beneficiaries.
- Which of the following statements is correct?
Answer: The estate may hold the stock for the remainder of its administration, but the S election will terminate on the day the stock is distributed to Klaus.
Authority: IRC §1361(b)(1)(B) (estates are permitted shareholders), IRC §1361(b)(1)(C) (a nonresident alien may not be a shareholder), and IRC §1362(d)(2) (termination is effective on the day the corporation ceases to be a small business corporation). Choice A is correct: an estate is an eligible shareholder for the duration of administration, so Marta's death does not terminate the election; the decisive event is the later distribution of the stock to Klaus, a nonresident alien, which makes the corporation cease to qualify on the distribution date. Choice B is wrong because estates are expressly permitted shareholders. Choice C is wrong because the two-year grace period applies to certain trusts after the grantor's death (IRC §1361(c)(2)(A)(ii)) and to testamentary trusts, not to nonresident alien individuals. Choice D is wrong because Form 8869 is used for the qualified subchapter S subsidiary election, and no election is required for an estate to hold S corporation stock.
- Which of the following is correct regarding the termination of an S corporation election?
Answer: If an S corporation ceases to be a small business corporation, the election terminates on the date the disqualifying event occurs and, absent IRS consent, the corporation cannot make a new S election for five years.
Under IRC § 1362(d)(2), when a corporation ceases to be a small business corporation, the S election terminates on the date the disqualifying event occurs; under IRC § 1362(g), absent IRS consent, a new S election cannot be made for five years; Choice A is correct. Choice B wrongly makes the termination retroactive to the beginning of the tax year. Choice C wrongly delays the effective date to year-end and makes it depend on a later stock disposition. Choice D is wrong because the termination is automatic on the disqualifying event, not on IRS determination.
- Which of the following is correct regarding the one-class-of-stock requirement for S corporation eligibility?
Answer: A corporation has one class of stock when all outstanding shares have identical rights to distributions and liquidation proceeds, and a qualifying straight debt instrument is not a second class of stock.
Under Treas. Reg. § 1.1361-1(l)(1) and IRC § 1361(b)(1)(D), a corporation has one class of stock if all outstanding shares confer identical rights to distribution and liquidation proceeds, and differences in voting rights are permitted; Choice C is correct. Choice A misstates the voting-rights rule. Choice B is wrong because the straight debt safe harbor under IRC § 1361(c)(5) does not require proportionate holdings by shareholders. Choice D is wrong because straight debt has no five-year maturity requirement; it must satisfy the statutory definition in § 1361(c)(5).
- What is the earliest tax year for which Delta's S corporation election can be effective?
Answer: 2026, because the Form 2553 was filed after the 15th day of the third month of Delta's 2025 tax year and is treated as made for the next tax year.
Governing authority: IRC §1362(b). For a calendar-year corporation, an S election for 2025 had to be filed by the 15th day of the third month of the tax year; because March 15, 2025, fell on a Saturday, the deadline was March 17, 2025 (IRC §7503). An election filed after that date during the same tax year is treated as made for the following tax year. Because the IRS received Delta's Form 2553 on March 24, 2025, and Delta did not request late-election relief, the earliest effective date is January 1, 2026. Choice B is correct. Choice A ignores the statutory deadline and the following-year rule. Choice C confuses the S election deadline with the tax return filing deadline. Choice D is wrong because a late election is not invalid; it takes effect in the next tax year.
- For purposes of the one-class-of-stock requirement, how many classes of stock does the corporation have?
Answer: 2
Under IRC §1361(b)(1)(D) and Treas. Reg. §1.1361-1(l)(1), a corporation has one class of stock only if all outstanding shares have identical rights to distributions and liquidation proceeds; differences in voting rights alone do not create a second class. The voting and nonvoting common stock are therefore one class. The preferred stock is a second class because its liquidation preference and dividend preference give it different distribution and liquidation rights. The promissory note is not stock: it qualifies as straight debt under IRC §1361(c)(5)(B), so it is not counted. Thus the corporation has 2 classes. Choice A (1) ignores the preferred stock. Choice C (3) treats the voting and nonvoting common as separate classes. Choice D (4) also treats the straight-debt note as a class of stock.
- Which statement is correct regarding Sterling's S corporation status?
Answer: The S election terminated on March 3, 2025, but the IRS may waive the termination under IRC §1362(f) if the termination was inadvertent and Sterling and its shareholders request relief and agree to required adjustments.
Governing authority: IRC §1361(b)(1)(B); IRC §1362(d)(2); IRC §1362(f). A partnership cannot be an S corporation shareholder, so the disqualifying transfer terminated the S election on March 3, 2025. Under §1362(f), the IRS may treat the termination as inadvertent and allow the election to continue if the corporation promptly took steps to restore eligibility and the corporation and shareholders agree to the IRS's required adjustments; the facts show Sterling promptly required a repurchase. Choice B is correct. Choice A is wrong because correcting the transfer within the same tax year does not automatically preserve S status; §1362(f) relief is still required. Choice C is wrong because the termination took effect on the date of the transfer, not when Sterling learned of it. Choice D is wrong because the IRS has authority to grant inadvertent-termination relief even though a partnership is an ineligible shareholder.
- Which of the following statements is correct regarding Cedar's S election?
Answer: The S election was not terminated because Cedar had no accumulated earnings and profits at the close of 2024, so it did not satisfy the three-year requirement for termination.
Authority: IRC §1362(d)(3)(A) (passive investment income termination requires both accumulated earnings and profits at the close of each of three consecutive tax years and gross receipts more than 25% passive in each of those years; the termination is effective on the first day of the following tax year). The decisive condition is the year-end earnings and profits requirement. Because Cedar distributed all of its accumulated earnings and profits before the close of 2024, it had no accumulated earnings and profits at the close of 2024, so the three-year test was not met and the election did not terminate. Choice A ignores the earnings and profits condition and the effect of the December 2024 distribution. Choice C is wrong because the excess net passive income tax under IRC §1375 applies only when the corporation has accumulated earnings and profits at the close of a tax year and excess passive income for that year; no such tax arises in 2025 on these facts. Choice D misstates both the measurement period and the effective date of a passive income termination.
- Which of the following is correct regarding an election to treat a subsidiary as a qualified subchapter S subsidiary (QSub)?
Answer: The election is made on Form 8869 by the parent S corporation for a domestic corporation that it wholly owns, and the QSub is generally disregarded as a separate entity for federal tax purposes.
Under IRC § 1361(b)(3)(B) and the Form 8869 instructions, a QSub election is made by the parent S corporation on Form 8869 for a domestic corporation that it wholly owns; the QSub is generally disregarded as a separate entity for federal tax purposes; Choice D is correct. Choice A names the wrong party and makes an incorrect automatic effective-date assumption. Choice B names the wrong form. Choice C is wrong because QSub status requires 100% ownership by the parent, not 80% ownership with eligible minority shareholders.
- Based on these facts, which of the following is correct regarding Crestview's S corporation election?
Answer: The election cannot be effective for 2025 because the partnership was an ineligible shareholder and the Form 2553 was filed late; the election becomes effective for the 2026 tax year.
IRC § 1362(b)(1) and (3): an S election filed after the 15th day of the third month of the tax year is treated as made for the following tax year; for a calendar-year corporation, the 2025 deadline was March 17 (March 15 fell on a Saturday). IRC § 1361(b)(1): a partnership is not a permitted shareholder of a small business corporation. Crestview's Form 2553 was filed April 2, 2025 — late for 2025 — and a partnership held Crestview stock from January 15 to March 1, 2025, so Crestview was not a small business corporation for 2025. Late-election relief under Rev. Proc. 2013-30 is unavailable because that relief applies only when the corporation fails to qualify solely because the election was untimely; the ineligible shareholder is an independent disqualifying factor. The election is therefore effective for 2026, the first year for which the filing was timely and the corporation was eligible. Choice A is wrong because late-election relief cannot cure an independent eligibility failure. Choice C is wrong because eligibility is not tested only on the filing date. Choice D is wrong because no election was in effect for 2025, so there was no termination and the five-year re-election bar of IRC § 1362(g) does not apply.
- Which statement is correct regarding Elm's eligibility to elect S corporation status?
Answer: Yes, because the family members are treated as one shareholder, and the voting-only difference does not create a second class of stock.
Governing authority: IRC §1361(b)(1), IRC §1361(c)(1), and IRC §1361(c)(4). Under §1361(c)(1), all members of a family within the six-generation limit are treated as one shareholder for the 100-shareholder test. The 60 family members therefore count as one shareholder, and the 50 unrelated shareholders count separately, for a total of 51. Under §1361(c)(4), stock that differs only in voting rights is not treated as a second class of stock if the shares have identical rights to distributions and liquidation proceeds. Choice C is correct. Choice A incorrectly counts family members individually and treats voting differences as a second class. Choice B also counts family members individually. Choice D is wrong because unrelated shareholders cannot be aggregated with family members merely by filing a single consent.
- Which of the following is correct regarding trusts as shareholders of an S corporation for 2025?
Answer: An electing small business trust (ESBT) may have a nonresident alien as a potential current beneficiary.
IRC § 1361(c)(2). Under § 1361(c)(2)(B)(v), as amended by the TCJA for tax years beginning after 2017, the nonresident alien prohibition of § 1361(b)(1)(C) does not apply to the potential current beneficiaries of an ESBT, so an ESBT may have a nonresident alien as a potential current beneficiary. Choice A is correct. Choice B misstates the period: under § 1361(c)(2)(A)(ii), a trust that was a grantor trust immediately before the deemed owner's death may remain an eligible shareholder for the two-year period beginning on the day of the death. Choice C misstates the timing: the current income beneficiary makes the QSST election, but it may be made within the 2-month-and-16-day period beginning when the stock is transferred to the trust, not only before. Choice D is wrong because a voting trust is itself a permitted S corporation shareholder under § 1361(c)(2)(A)(iv); no QSST election is required.
