Question

Hialeah Corp. is a calendar year S corporation. In the current year, one of Hialeah's lesser shareholders (<1%) sold his shares to another individual. Due to a mix up by the attorneys handling the sale, the shares were inadvertently transferred to a corporation as owner. As soon as reasonably possible, the shares were re-titled into the hands of the individual. Must Hialeah wait until the start of the fifth year to re-elect S corporation status?

Answer 1

Hialeah Corp. may not have to wait five years to re-elect S corporation status if the share transfer was inadvertent. They can request relief from the IRS and upon approval, reinstate their S status once the shares are correctly retitled to an individual.

Step-by-step explanation:

When an S corporation's shares are transferred to an ineligible entity, such as another corporation, it can result in the termination of the S corporation status. Typically, an S corporation must wait five years to re-elect S status after an inadvertent termination. However, if the termination was inadvertent, the corporation can request relief from the IRS. This allows for the correction of the error and reinstatement of the S corporation status without the five-year waiting period. To qualify for this relief, Hialeah Corp. must explain to the IRS how the mistake happened and ensure that the mistake is corrected in a reasonable amount of time. As soon as the shares were re-titled to an individual, which is an eligible shareholder, the company can submit a request for relief along with their S corporation election after receiving IRS approval.