Coordination of elections by S shareholders to close the books for allocation purposes.

• Author: Payne, Jay
• Position: Brief Article

The proposed regulations under Sec. 1377 give guidance on how taxpayers are to coordinate the three different elections that S corporations can make concerning the closing of the books. Depending on the circumstances, S corporations can make an election to close the books under Sec. 1362 (e) (3) (termination of S status), Sec. 1377 (a) (2) (termination of shareholder status) or Regs. Sec. 1.1368-1 (g) (2) (qualifying disposition of stock).

Although the events that may allow an S corporation to make one of these elections are not mutually exclusive, it appears the IRS intends that only one election can be made in any one situation. Under Prop. Regs. Sec. 1.1377-1 (b) (1), if a transfer results in a termination of the shareholder's entire interest as a shareholder and the transfer also constitutes a qualifying disposition under Regs. Sec. 1.1368-1 (g) (2) (i), the terminating election rules under the Sec. 1377 proposed regulations take precedence and a qualifying disposition election cannot be made. The Service apparently has asserted this priority on the elections because the Sec. 1377 (a) (2) election is statutorily derived, while the Regs. Sec. 1.1368-1 (g) (2) election is not.

If a termination of a shareholder's entire interest results in a termination under Sec. 1362 (d) (2), however, Prop. Regs. Sec. 1.1377-1 (b) (1) provides that the corporation may not make a shareholder termination election under Sec. 1377(a) (2). When a corporation's election to be an S corporation terminates, the portion of the...