Krause Corporation Makes an S Election,believing That It Has No

question 36

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 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:

S-corp

A special designation for a corporation in the United States that allows profits and losses to be passed through to shareholders to avoid double taxation on corporate income.

C-corp

A type of corporation in the United States that is taxed separately from its owners, as defined under subchapter C of the Internal Revenue Code.

Investment

The allocation of resources, usually money, with the expectation of generating an income or profit.

Dividends

A portion of a company's earnings that are distributed to shareholders, usually on a quarterly basis.