Krause Corporation Makes an S Election, Believing That It Has

question 4

Multiple Choice

Krause Corporation makes an S election, believing that it has no current or accumulated E&P. However, after an IRS audit, Krause is found to have failed the passive investment income test for three consecutive years and also to have a Subchapter C E&P balance from its three pre-election tax years. The IRS will

• A)automatically terminate the election and Krause cannot reelect for a 5-year time period.
• B)retroactively revoke the election to the first day on which it was effective and Krause will not be able to reelect.
• C)treat the error as such and allow the election to continue unbroken.
• D)likely treat the termination as inadvertent and will probably approve a continued S election if the corporation distributes the Subchapter C E&P.

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Definitions:

Significant Piece

An important or notable part of something, often referring to a key element that has a major impact or role.

Legislation

Laws or statutes that have been formally enacted by a legislative body to regulate, authorize, prohibit, or provide frameworks for various activities and policies.

Agency

An organization, company, or bureau that provides a specific service.

Polygraph Test

A lie detector test that measures and records several physiological indices such as blood pressure, pulse, respiration, and skin conductivity while the subject answers a series of questions.