Final answer:
The statement is false; S corporations, whether or not they have previously been C corporations, are subject to possible involuntary termination of their S status if passive investment income exceeds certain thresholds.
Step-by-step explanation:
The statement that an S corporation may earn passive investment income without fear of an involuntary S election termination, even if it has never operated as a C corporation, is false. S corporations are subject to strict regulations regarding passive investment income. If an S corporation has accumulated earnings and profits from previous tax years when it may have been a C corporation and passive investment income exceeds 25% of gross receipts for three consecutive tax years, its S election can be involuntarily terminated. However, since this question specifies that the S corporation never operated as a C corporation, the presence of accumulated earnings and profits from prior tax periods would not be a concern. Yet, even in this scenario, if the passive investment income exceeds the threshold, the S corporation may still face termination of its S status after receiving IRS notice and failing to take corrective action within the specified time frame.