Category: Corporations Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com ABC Systems and ABC Trucking Elected S Corporation status. The S election of Trucking was recently inadvertently terminated. The officers and shareholders of ABC Systems, Inc. and ABC Trucking, Inc. are anxious to reestablish their S election as soon as possible. To that end, it has been suggested that the parties form a new corporation, NEWCO, which would then make an S election. Thereafter, the two old ABC corporations would merge into NEWCO with NEWCO surviving. Section says a corporation whose S election has been terminated cannot re-elect S status for a period of five years following the termination. This prohibition applies not only to the corporation itself but also to any successor corporations. Regulation Section 1.1362-5(b) says a corporation is a successor to the terminated corporation if A) 50% or more of the stock of the new corporation is owned directly or indirectly by the same persons who owned the stock of the terminated corporation; and B) either the new corporation acquires a substantial portion of the assets of the terminated corporation, or a substantial portion of the assets of the new corporation were assets of the old corporation. In this case, the terminated corporation is ABC Trucking, Inc. I rather suspect that NEWCO would be owned by exactly the same people as ABC Trucking, Inc. Moreover, a substantial portion of the assets of NEWCO would come from ABC Trucking. It seems to me that NEWCO would clearly be a successor corporation under Section 1362(g) and Regulation Section 1.1362-5(b). Accordingly, NEWCO would have to wait five years to elect S status. I think the results would be exactly the same if instead of the merger described above, ABC Trucking merged into ABC Systems with Systems surviving. |
