Issue 1:
• Does Beta Corporation continue to qualify for the S corporation election even though Juan no longer owns 100% of Beta corporation’s stock (as of June 30th of Year 2)?
Conclusion 1:
• Yes, Beta Corporation still qualifies for the S corporation election because it continues to fulfill the requirements for an eligible small business corporation, regardless of the change in stock distribution.
Analysis 1:
As defined in Sec.1361(a)(1), an S corporation is an “eligible small business corporation”, whose election to be treated as an S corporation has already gone into effect for the year the election was made. Additionally, to prove that a corporation is in fact an eligible small business corporation, it needs to satisfy the specific criteria provided in Sec. 1361(b)(1). Therefore, since Beta was permitted to make the S corporation election in its first year of business, it …show more content…
1361 (c)(1)(B)(i), the first option is not possible for Marta because, for one, she does not own more than half of the company’s stock. Also, even though she technically owns a half of Beta’s shares she is not considered a separate shareholder from Juan. According to the special rules for applying Sec.1361(b)—a section that defines an eligible small business corporation for the S Corporation election—all members of a family (including former spouses) are treated as single shareholders along with the “common ancestor” (Juan); Sec.1361(c)(1)(B)(ii) further defines a common ancestor by requiring the individual (Juan) to be no more than 6 generations removed from the family members. Since, Marta is a former spouse, she will be treated as though she belongs to Juan’s generation. Consequently, Marta would need Juan Estefan’s consent for revocation (option 2) to terminate the S election. In addition, Juan would need to maintain his position to consent to the termination on the date that the revocation takes place, otherwise the election will remain in
• Does Beta Corporation continue to qualify for the S corporation election even though Juan no longer owns 100% of Beta corporation’s stock (as of June 30th of Year 2)?
Conclusion 1:
• Yes, Beta Corporation still qualifies for the S corporation election because it continues to fulfill the requirements for an eligible small business corporation, regardless of the change in stock distribution.
Analysis 1:
As defined in Sec.1361(a)(1), an S corporation is an “eligible small business corporation”, whose election to be treated as an S corporation has already gone into effect for the year the election was made. Additionally, to prove that a corporation is in fact an eligible small business corporation, it needs to satisfy the specific criteria provided in Sec. 1361(b)(1). Therefore, since Beta was permitted to make the S corporation election in its first year of business, it …show more content…
1361 (c)(1)(B)(i), the first option is not possible for Marta because, for one, she does not own more than half of the company’s stock. Also, even though she technically owns a half of Beta’s shares she is not considered a separate shareholder from Juan. According to the special rules for applying Sec.1361(b)—a section that defines an eligible small business corporation for the S Corporation election—all members of a family (including former spouses) are treated as single shareholders along with the “common ancestor” (Juan); Sec.1361(c)(1)(B)(ii) further defines a common ancestor by requiring the individual (Juan) to be no more than 6 generations removed from the family members. Since, Marta is a former spouse, she will be treated as though she belongs to Juan’s generation. Consequently, Marta would need Juan Estefan’s consent for revocation (option 2) to terminate the S election. In addition, Juan would need to maintain his position to consent to the termination on the date that the revocation takes place, otherwise the election will remain in