Taking an S corporation public.

• Jurisdiction: United States
• Author: Schlather, Paul J.
• Date: 01 November 1995

As the stock market continues to be a valuable source of new funding for businesses, many S corporations have undergone initial public offerings (IPOs). These offerings raise many significant tax issues that need to be addressed on behalf of the S corporation and its shareholders. Among them are:

* Termination of S status caused by an IPO.

* Making distributions from the accumulated adjustments account (AAA).

* Disposition of unwanted corporate assets before an IPO.

* C corporation and shareholder estimated tax requirements.

* Reincorporating an S corporation before an IPO via an F reorganization, and meeting the continuity-of-interest test.

* Each case should be analyzed on its facts to determine whether not only these but also any other important tax factors must be considered.

Termination of S status

S status is terminated by the public offering; the entity ceases to be a qualified small business corporation. The termination of S status causes the corporation's tax year to be split into a short S year and a short C year, and its income to be prorated on a daily basis for the year (Sec. 1362(e)). The S corporation may avoid the proration of income by electing to close its books on the last day of the S year (Sec. 1362(e)(3)) if it obtains the consent of all who were shareholders during the S short year and all who are shareholders on the first day of the C year. In the public offering setting, the S corporation must obtain consent from all those who purchased shares in the public offering, which can be difficult and costly. Accordingly, it is generally beneficial to revoke the S election...