Question

Cato Corporation incorporated six years ago in California, with Tim and Elesa, husband and wife, owning all the Cato stock. Immediately thereafter, Cato made an S election effective for that year. Tim and Elesa filed the necessary consents to the election. On March 10 of last year, Tim and Elesa transferred 15% of the Cato stock to the Reid and Susan Trust, an irrevocable trust created three years earlier for the benefit of their two minor children. Early in the current year, Tim and Elesa’s tax accountant learns about the transfer and advises the couple that the transfer of the stock to the trust may have terminated Cato’s S election. Research sources suggested by the tax manager include Secs. 1361(c)(2), 1362(d)(2), and 1362(f). Question: Is the accountant right? Will the transfer made by both Tim and Elesa terminate the S election of the corporation? please support your answer with Secs. 1361(c)(2), 1362(d)(2), and 1362(f)

Answer 1