Question

1.AIRE was initially formed as an S corporation three years ago. AIRE has four equal shareholders Adam, Irene, Raymond, and Ethan. Raymond and Ethan would like to terminate the S election. However, Adam and Irene are opposed to the idea. Can Raymond and Ethan make a voluntary election to terminate the S election without the consent of Adam and/or Irene? Explain.

2.Shea is a 100% owner of Mets Corporation (an S corporation). Mets is a calendar year taxpayer. On February 16, 2017, Mets filed an election to terminate its S election. Assuming Mets does not specify an effective date for the termination, what is the effective date of the termination?

3.ABC Corp. elected to be taxed as an S Corporation when it was initially formed. During its first three years of existence, it reported passive investment income in excess of 25 percent of its gross receipts. Is ABC's S election terminated under the excess passive investment income test? If so, what is the effective date of the termination? If not, why not?

4.Neal Corporation was initially formed as a C corporation with a calendar year end. Neal elected S corporation status, effective January 1, 2017. On December 31, 2016, Neal Corp. reported earnings and profits of $150,000. Beginning in 2017, Neal Corp. reported the following information. Does Neal Corp.'s S election terminate due to excess net passive income? If so, what is the effective date of the termination?

Year	Gross Receipts (including passive investment income)	Passive investment income		Corporate Earnings and Profits (end of year)
2017	$400,000	$	120,000	$	140,000
2018	$300,000	$	70,000	$	100,000
2019	$500,000	$	130,000	$	70,000
2020	$400,000	$	110,000	$	40,000
2021	$600,000	$	155,000	$	1,000

Answer 1

1) No, since for voluntary terminate the S election more that 50% of the stock should be owned by the partners electing for voluntary termination. Since, Raymond and Ethan own exactly 50% and not more than 50%, they can not terminate the S corporation.

2) 1st January, 2017. Since Mets filed the election for termination within 2.5 months of beginning of the next tax year, the effective date will be beginning of the tax year = 1st January, 2017

3) No. The passive investment income test for S election termination is applicable only when a C corporation converts to S corporation. Since, ABC was always operating as S corporation, the passive investment income test does not apply to it.

4) Yes. On 1 January, 2022.

If the S corporation has both "earinings and profits" and "excess passive investment income" for 3 consecutive tax years, the S corporation status is revoked on the first day of the fourth year.

Excess passive investment income = Passive investment income over 25% of gross receipts.

Year	Gross Receipts (including passive investment income)	Passive investment income	Passive investment income as a % of gross receipts
2,017	400,000	120,000	30.00%
2,018	300,000	70,000	23.33%
2,019	500,000	130,000	26.00%
2,020	400,000	110,000	27.50%
2,021	600,000	155,000	25.83%

Since the company's Passive investment income > 25% of gross receipts consecutively for year 2019, 2020 and 2020, alonwith "earnings and profits" for each of these years , the S corporation status is revoked on the first day of the fourth year i.e. 1 January, 2022.

Kindly give a thumbs up!!