Also known as:Subchapter S elections · S election · Sub S election
Written by attorneys · grounded in primary & secondary sources — see below
A filing with the Internal Revenue Service by which an eligible corporation elects to be taxed under Subchapter S of the Internal Revenue Code. The election causes the corporation's income to pass through to shareholders and be taxed only at the individual level, eliminating the double taxation that otherwise applies to C corporations.
Sources & Authorities
How it applies
Common Examples
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Contribution Timing and Recusal Analysis
Stella Shapiro, counsel for Starlight Media, contributed $2,500 to a sitting judge's retention campaign six months before trial. The corporation had filed a Subchapter S election the prior year, allowing its income to pass through to shareholders. The opposing party moved to disqualify the judge on the basis of the contribution. The court examined the amount, its proportion of total campaign funds, and the timing to decide whether a reasonable person would question impartiality.
Election Between Appraisal and Fraud Claims
Sierra Santos, a minority shareholder in Silverline Industries, filed both an appraisal action and a fraud suit after a merger. The company had made a Subchapter S election years earlier, so its built-in gains passed through to shareholders. The court required Santos to elect which remedy to pursue after discovery, because the Subchapter S status affected the tax consequences of any recovery.
Samantha Stone formed Spectrum Financial as a C corporation and later filed a Subchapter S election to avoid double taxation on earnings. The corporation then made independent expenditures supporting a candidate. The Court held that the First Amendment protects such expenditures regardless of the entity's tax classification under Subchapter S.
Citizens United v. Federal Election Commission558 U.S. 310, 352 (2010)
Common questions
Frequently Asked
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What tax consequence follows once a corporation files a Subchapter S election?+
The corporation's income, losses, deductions, and credits pass through to the shareholders and are taxed only at the individual level. This eliminates the corporate-level tax that would otherwise apply to a C corporation.
Can a Subchapter S election be revoked after it is filed?+
Yes. Shareholders holding more than one-half of the shares may revoke the election. If the revocation is filed on or before the fifteenth day of the third month of the taxable year, it is effective for that year. Otherwise it becomes effective the following year.
What built-in gains tax applies after a Subchapter S election?+
A corporate-level tax is imposed on net recognized built-in gains that arose before the effective date of the S election and are recognized within a specified recognition period. The tax prevents the election from being used to escape corporate tax on pre-election appreciation.
Does passive investment income terminate a Subchapter S election?+
Passive investment income terminates the election only if the corporation has accumulated earnings and profits at the close of each of three consecutive taxable years and the passive income exceeds 25 percent of gross receipts in each of those years.
558 U.S. 310, 352 (2010)Business Associations
…case had a significant and disproportionate influence in placing the judge on the case by raising funds or directing the judge’s election campaign when the case was pending or imminent.” Id. , at (slip op., at 14). The remedy of recusal was based on a litigant’s due process right to a fair trial before an unbiased judge.…