Assignment on a Loss of S Corporation Status

S Corporation Status

In this discussion, you are faced with a situation involving a shareholder threatening to take action that will result in a loss of S corporation status. You must determine an appropriate response. 

Electing to be taxed as an S corporation can have many benefits. However, a corporation must continuously meet requirements to qualify for such status. Failure to meet these requirements, at any time, can result in the loss of S corporation status and costly consequences. 

Scenarios

Burt is the custodian at Quaker Inn, an S corporation that has paid him bonuses over the years in the form of shares in the corporation. Burt now holds 276 shares in Quaker Inn.

While listening to a television debate about a national health care plan, Burt decides that the company’s health coverage is unfair. He is concerned about this because his wife, Dora, is seriously ill.

During the second week of December, Burt informs Quaker’s president that he would like a Christmas bonus of $75,000 cash, or else he will sell 10 shares of his stock to one of his relatives, a nonresident alien. The resulting loss of the S election would trigger about $135,000 in federal corporate income taxes for the current year alone. How should Quaker Inn’s management respond to Burt’s threat? From Burt’s point of view, do you see any unintended consequences if he follows through on his threat?