Krause Corporation makes an S election, believing that it has no current or accumulated E&P. However, after an IRS audit, Krause is found to have failed the passive investment income test for three consecutive years and also to have a Subchapter C E&P balance from its three pre-election tax years. The IRS will
A. automatically terminate the election and Krause cannot reelect for a 5-year time period.
B. retroactively revoke the election to the first day on which it was effective and Krause will not be able to reelect.
C. likely treat the termination as inadvertent and will probably approve a continued S election if the corporation distributes the Subchapter C E&P.
D. treat the error as such and allow the election to continue unbroken.
Answer: C
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