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November 22, 2005

When I started tax practice in 1984, an S corporation was limited to 35 shareholders; spouses counted as one shareholder.

The increased popularity of S corporations triggered congress to increase the limit, first to 75, then to 100. In some instances, though, the number can now be much larger.

A provision in the 2004 "American Jobs Creation Act" allows S corporations to consider members of a "family" to be a counted as a single taxpayer. For this purpose, a family is any group with a common ancestor going back six generations.

NOTICE 2005-91

One year later, the IRS has finally come with a procedure for families to elect to be counted as a single shareholder. Notice 2005-91 says the election may be made by any family member; all that is required is to identify the name of the family member making the eliction, the "common ancestor" of the family to which the election applies, and the first taxable year for which the election is to be effective.

The S corporation family provisions took effect on January 1, 2005, but the notice was delayed until today. Some families have already joined in S corporation elections and have cobbled together their own notification in the absence of IRS guidance; the Notice says they will have to provide the required information to the S corporation to perfect the election. Notice 2005-91 also cleans up some loose ends on how trusts and estates get counted in measuring family members.


S corporations can now be quite large. A few years back I went to a reunion for the descendants of Heinrich and Anna Scheunemann, who moved to Illinois from Westphalia in the 1850s. They produced seven children, all of whom produced their own kids. There were, I think, about 300 people at the reunion, and these were only a fraction of those eligible to attend. I am in the fifth generation of descendants, so my kids also are part of the "family." Except for a few seventh generation kids, and some unmarried significant others, the whole reunion counted as one shareholder, in case we ever want to be an S corporation. And then we can get together with 99 other families.

Research is under way to determine whether Missouri is now eligible to make an S corporation election.

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