[SOUND] [MUSIC] Let's now apply these concepts to Sunchaser Shakery. Sunchaser Shakery Corporation was formed under section 351 with contributions of property by Nicholas, Emily, Michael, and Marley Corporation. And part a ask, is Sunchaser eligible to make a Subchapter S election? In short, the answer is no, they're not eligible. Why? Because one of Sunchaser's shareholders is a corporation. Part b says, assume Nicholas, Michael, and Emily recruit 97 U.S. resident shareholders. Also assume Nicholas gave some of his shares to his grandfather and grandmother such that there are now 102 shareholders. Marley is no longer a shareholder. And again the question is, is Sunchaser eligible to make a Subchapter S election? So let's draw a quick figure just to make sure we understand what's going on. We have Nicholas, Michael and Emily as well as 97 others that they've recruited, totalling 100 shareholders. In addition we're told that Nicholas gave some of his shares to his grandfather and his grandmother, which is where the 102 shareholder number comes from. And so the question is whether or not Sunchaser is now eligible to elect Subchapter S. Obviously one of the key considerations is that there's not more than 100 shareholders which is the restriction imposed on the Subchapter S election. However, under the family attribution rules in section 318, Nicholas, his grandfather and his grandmother, are viewed as one shareholder, because we're looking at descendants of common ancestors. So in other words, Nicholas, his grandfather, and his grandmother are all viewed to be the same for this purpose. In other words, we only have 100 shareholders. Thus in this situation, Sunchaser is eligible. Nicholas and 134 other investors want to form an S corporation. Nicholas believes that if he and the investors form a partnership, the partnership can then form an S corporation and act as a single shareholder, thereby avoiding the 100-shareholder rule under Subchapter S. Is Nicholas's tax reasoning correct? In short, the answer is no, because partnerships cannot own S corporation stock, thus it's not eligible for the Subchapter S election. Sunchaser Shakery Corporation elected Subchapter S status several years ago. However, in a recent corporate restructuring, Sunchaser transfered its stock to a U.S. partnership. How does the corporate restructuring effect Sunchaser's Subchaper S status if at all? Because an S corporation can not have a partnership as a shareholder, the Subchapter S election is immediately revoked. Nicolas, Emily, and Michael own 60%, 20% and 20% of Sunchaser Shakery Corporation, respectively. The shareholders made a valid Subchapter S election several years ago. Nicholas recently decided to retire and gave his shares to his nephew, Ziggy, who became the president of Sunchaser. What we want to know, does the transfer of stock to Ziggy terminate the S election? So recall that Subchapter S corporation status is automatically terminated if any event occurs that would prohibit the election in the first place. Here no act occurred that would make the election unavailable. However, given that the change of ownership is greater than 50%, that is Nichols's 60% share is what was transferred to Ziggy, Ziggy must give consent for Subchapter S status going forward.