Although it is a small company, Zorn Enterprises owns a large number of inexpensive rental housing units in Texas and Louisiana. Currently, the company is a chartered C-corporation, but the owners are interested in switching to an S corporation. After consulting a lawyer, they learned that Zorn Enterprises does not qualify to be designated as an S corporation. Which of the following characteristics of Zorn Enterprises would prevent it from becoming an S corporation?
A)The firm has fewer than 75 stockholders.
B) The firm is chartered in one state, but owns property in another.
C) The firm has only one class of stock, all owned by U.S. citizens.
D)The firm receives more than 70 percent of its income from rents and other passive sources.

Question

Quizplus · Accepted Answer

According to IRS regulations, to qualify as an S corporation, the corporation cannot derive more than 25% of its gross receipts from passive sources such as rents, royalties, and interest. Since Zorn Enterprises derives more than 70% of its income from rents and other passive sources, it does not meet this requirement and cannot be designated as an S corporation. The other characteristics (A, B, and C) do not necessarily prevent Zorn Enterprises from being designated as an S corporation.

Although It Is a Small Company, Zorn Enterprises Owns a Large