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.

Question

Quizplus · Accepted Answer

The IRS will likely treat the termination as inadvertent and allow the corporation to continue its S election if it distributes its Subchapter C E&P. The IRS has the authority to approve a continued S election if it is satisfied that the termination was due to inadvertence and the corporation takes corrective action. In this case, the failure to meet the passive investment income test may have been inadvertent, and the corporation may be able to distribute its E&P to regain its S corp status.

Krause Corporation Makes an S Election, Believing That It Has