S election issues for community property shareholders.

• Author: Headley, Richard A.

S corporation status is not automatic for a qualifying small business corporation. To elect to be taxed as an S corporation, a corporation must submit to the IRS a timely election that is consented to by afl shareholders as of the day the election is made. The election is made by filing a completed Form 2553, Election by a Small Business Corporation, accompanied by the required shareholder consents.

Shareholder consents

Regs. Sec. 1.1362-6(b)(2)(i) states that if stock of the electing corporation is held as community property, or if the income from the stock is community property, both the husband and the wife must consent to the S election. The statute providing that stock held by a husband and wife as community property is considered to be held by only one shareholder applies only in determining whether the 35-or-fewer shareholders requirement has been satisfied.

Delinquent consents

Since all shareholders as of the date of the election must consent, if only one spouse of a community property stock interest consents, the S election will be invalid (since unanimous shareholder consent was not obtained). There is a method for curing a defective election, however, when the sole problem is the lack of unanimous shareholder consent.

An extension of time for filing consents to an election may be allowed, provided the requirements set forth in Regs. Sec. 1. 1362-6(b)(3)(iii) are met. An election will not be considered invalid if the taxpayer can demonstrate to the satisfaction of the IRS that

--there was reasonable cause for the failure to file the shareholder consent(s);

--the request for the extension of time to file a consent is made within a reasonable time under the circumstances; and

--the...