A domestic corporation wants to elect S corporation status effective for its 2025 tax year by filing Form 2553. Under IRC Section 1361(b), which of the following would DISQUALIFY it from being an eligible small business corporation?
- The corporation has 85 shareholders, all of whom are U.S.-resident individuals
- The corporation's single class of stock gives every shareholder identical distribution and liquidation rights, even though some shares carry voting rights and others do not
- One of the corporation's shareholders is a qualified subchapter S trust that has made a valid election to be treated as an eligible shareholder
- One of the corporation's shareholders is a domestic partnership holding its shares on behalf of several individual partners
Why D? And why not the others?
Correct answer: D. One of the corporation's shareholders is a domestic partnership holding its shares on behalf of several individual partners
IRC Section 1361(b)(1)(B) limits eligible S corporation shareholders to individuals, estates, and certain qualifying trusts; partnerships and corporations are not eligible shareholders even when they hold shares merely as a pass-through vehicle for otherwise-eligible individuals, so a domestic partnership appearing on the shareholder list disqualifies the corporation from S status. The option describing 85 individual shareholders does not disqualify the corporation, since Section 1361(b)(1)(A) caps eligible shareholders at 100 and 85 is comfortably under that limit. The option describing identical distribution and liquidation rights despite differing voting rights does not disqualify the corporation either, because Treasury regulations under Section 1361 treat differences in voting rights alone as not creating a second class of stock, so the one-class-of-stock requirement is still satisfied. The option describing a qualified subchapter S trust that made a valid election also does not disqualify the corporation, since such a trust is expressly treated as an eligible shareholder once the election is properly made.
Source: IRC Section 1361(b) and (c); Treas. Reg. Section 1.1361-1(l) (one class of stock)