Reference no: EM132649431

Problem - Clay Corporation has been an S corporation since its incorporation 10 years ago. During the first three years of operations, it incurred total losses of $250,000. Since then, Clay has generated earnings of approximately $180,000 each year. None of the earnings have been distributed to the three equal shareholders, Claire, Lynn, and Tomás, because the corporation has been in an expansion mode.

At the beginning of the current year, Claire sells her stock to Nell for $400,000. Nell has reservations about the utility of the S election. Therefore, Lynn, Tomás, and Nell are discussing whether the election should be continued. They expect the earnings to remain at approximately $180,000 each year. However, because they perceive that the expansion period is over and Clay has adequate working capital, they may start distributing the earnings to the shareholders.

All of the shareholders are in the 32% tax bracket. Advise the three shareholders on whether the S election should be maintained.