An Albuquerque distribution company in Chapter 11 expects to sell its assets in July for a $3,000,000 gain. If it is still an S corporation then, the owners report the gain on their returns and the cash remains in the estate. Whether the owners can change that depends less on who may revoke an S corporation election than on when they do it.
The firm’s earlier post on Owoc and the S election in bankruptcy covered the first point: in Owoc v. Liquidating Trustee, No. 24-14048 (11th Cir. Aug. 10, 2026), the Eleventh Circuit held the election belongs to the shareholders, not the estate. This post takes up the mechanics of 26 U.S.C. § 1362, the timing math, and a Ninth Circuit affirmance on the reverse question: can an election end without anyone choosing to end it?
What does it take to revoke an S corporation election?
No IRS form exists. Under Treas. Reg. § 1.1362-6(a)(3), the corporation files a statement revoking its election with the service center where the election was filed, states the shares outstanding (nonvoting included), and attaches signed consents. Section 1362(d)(1)(B) requires consent from holders of more than one-half of the shares on the day of revocation. In a 70/30 company, the 70 percent holder can revoke alone.
Under § 1362(d)(1)(C) and (D), a revocation made by the 15th day of the third month (March 15 for a calendar-year company) reaches back to January 1. A later one takes effect the next January 1 unless it names a date on or after filing. Treas. Reg. § 1.1362-2(a) allows rescission before the effective date, with consent from everyone who signed and anyone who has bought in since. A March revocation is already effective when filed, so it leaves no window to rescind.
Why is March 15 the date that matters when a sale is coming?
A revocation effective January 1 avoids a split year, since under § 1362(e)(4) an S termination year is one in which termination takes effect after day one. The whole sale year becomes a C corporation year.
Owoc shows the cost of missing that window. The sale closed in July 2023, and by the appeal the 2023 dates had long passed, leaving the shareholder an uncertain private letter ruling request and a remand on whether he may still terminate under § 1362(d)(2) or is barred by laches (slip op. at 6 to 7, 20 to 22). No published Tenth Circuit or District of New Mexico decision on the stay question was located on review.
For a C year, 26 U.S.C. § 1399 creates no separate taxable entity for a corporate debtor; § 1398 covers only individuals. Tax incurred by the estate is an administrative expense under 11 U.S.C. § 503(b)(1)(B), with second priority under § 507(a)(2). The trustee can then request a prompt determination under 11 U.S.C. § 505(b); if the IRS does not select the return for examination within 60 days, paying the tax shown ends the estate’s liability.
What happens when the revocation takes effect mid-year?
After March 15, a prospective date splits the year into S and C short years under § 1362(e)(1). The default rule in § 1362(e)(2) then spreads the year’s income evenly across every day, whenever it was earned, so part of a July gain falls back on the shareholders.
A § 1362(e)(3) election substitutes normal accounting and leaves the gain in the C short year. Treas. Reg. § 1.1362-3(b)(1) requires consent from every shareholder during the S short year and on the first day of the C short year, so the 30 percent holder who could not stop the revocation can stop this. It is also the corporation’s election, filed with the C short year return (Treas. Reg. § 1.1362-6(a)(5)). In bankruptcy, the trustee makes that return under 26 U.S.C. § 6012(b)(3), or a debtor in possession does with a trustee’s powers under 11 U.S.C. § 1107(a). Owoc did not say who controls this election, and no decision on the point was located on review. An estate fiduciary has little reason to volunteer an election that doubles the estate’s tax.
Annualizing the C short year under § 1362(e)(5) is neutral at the flat 21 percent rate in 26 U.S.C. § 11(b), and the stock-sale exception in § 1362(e)(6)(D) does not reach an asset sale.
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How do the numbers come out for an Albuquerque distributor?
Hypothetically, the distributor has been an S corporation since formation, is owned 70/30, and files Chapter 11 on February 8, 2027. Its assets sell in July for a $3,000,000 gain, operations otherwise break even, and the owners pay an assumed 30 percent federal rate. In the prospective cases, a May revocation names June 30, 2027, leaving a 180-day S short year and a 185-day C short year.
Daily proration sends $1,479,452 (180/365 of the gain) back to the owners and leaves the corporation $319,315 of tax on the rest. New Mexico runs parallel, since the corporate rate in NMSA 1978, § 7-2A-5 and the top joint-filer rate in NMSA 1978, § 7-2-7 are both 5.9 percent.
| Hypothetical scenario | Who must sign | Gain taxed to owners | Corporate tax (estate) | Owners’ tax at 30% |
|---|---|---|---|---|
| No revocation | No one | $3,000,000 | $0 | $900,000 |
| Revocation filed Mar. 10, 2027 | Holders of over half | $0 | $630,000 | $0 |
| June 30 revocation, daily proration | Holders of over half | $1,479,452 | $319,315 | $443,836 |
| June 30 revocation plus § 1362(e)(3) | Majority, then all owners and the corporation | $0 | $630,000 | $0 |
What does a revocation cost if the company survives?
Under § 1362(g), a corporation cannot re-elect S status before its fifth taxable year after the termination without IRS consent. Treas. Reg. § 1.1362-5(a) says consent is ordinarily denied unless more than half the stock has changed hands or the event was outside the owners’ control and not part of a plan. A revocation is a plan. Inadvertent-termination relief under § 1362(f) reaches terminations under § 1362(d)(2) and (3), not revocations.
That matters little in a liquidation but a lot in a Subchapter V case where the owners keep a company that stays a C corporation for years. In New Mexico it owes the 5.9 percent corporate tax and the $50 franchise tax under NMSA 1978, § 7-2A-5.1, and it loses the elective entity-level tax in NMSA 1978, § 7-3A-10, which only a federal pass-through entity can use.
Can a co-owner’s misconduct end the election instead?
Not under Maggard. James Maggard owned 40 percent of a California engineering firm whose co-owners paid themselves far beyond their share and froze him out. He argued the payouts amounted to a second class of stock, which 26 U.S.C. § 1361(b)(1)(D) forbids. In Maggard v. Commissioner, T.C. Memo. 2024-77, the Tax Court disagreed. Treas. Reg. § 1.1361-1(l)(2)(i) tests rights under the governing provisions, and Rev. Proc. 2022-19, § 3.02, says unequal distributions do not create a second class when those provisions give identical rights. The documents were never amended, so Maggard was taxed on his share under 26 U.S.C. § 1366. The Ninth Circuit affirmed in an unpublished memorandum, Maggard v. Commissioner, No. 25-4131 (9th Cir. Aug. 26, 2026), citing Moore v. United States, 602 U.S. 572 (2024).
What can a New Mexico minority owner do instead?
A 30 percent owner cannot revoke, and Maggard rules out the misconduct route. Any shareholder can still terminate under § 1362(d)(2) by transferring shares to an ineligible holder such as a corporation, unless a shareholder agreement restricts transfers, and the lockout follows. An owner who sells out mid-year can split the year at the sale date under 26 U.S.C. § 1377(a)(2), if the corporation and all affected shareholders agree. Beyond that, the remedy runs against the co-owners under state law. In New Mexico, NMSA 1978, § 53-16-16 lets a court liquidate a corporation in a shareholder’s action where those in control acted illegally, oppressively, or fraudulently, or assets are being misapplied or wasted.
Frequently Asked Questions
What is the deadline to revoke an S corporation election for the current year?
For a calendar-year corporation, a revocation made by March 15 is effective January 1 of that year. A later one takes effect the next January 1 unless the statement names a date on or after filing. A deadline that falls on a weekend or holiday rolls to the next business day.
Can a 30 percent shareholder revoke an S election alone?
No. Revocation needs consent from holders of more than one-half of the shares on the day it is made, nonvoting stock included. A minority holder can, however, block the closing-of-the-books election under section 1362(e)(3), which requires consent from every shareholder of the S short year and on the first day of the C short year.
Do disproportionate distributions end an S election?
Not by themselves. The one-class-of-stock test looks at governing provisions, meaning the articles, bylaws, state law, and binding agreements, rather than what was actually paid. In Maggard the documents still gave identical rights, so the election survived and the frozen-out owner was taxed on his share.
How long must a company wait to become an S corporation again after revoking?
Generally until its fifth taxable year after the termination, unless the IRS consents earlier. Consent is ordinarily denied unless more than half of the stock has changed hands or the event was outside the owners’ control and not part of a plan, which a revocation never is.
Who owes the tax on a bankruptcy sale once the S election is revoked?
The corporation. A corporate bankruptcy creates no separate taxable entity, so the debtor owes tax for its C corporation period, and a tax incurred by the estate is an administrative expense with second priority. A prompt determination request under section 505(b) can fix the amount.
How North Star Law Firm Can Help
North Star Law Firm works with New Mexico S corporation owners on ending an S election before a sale, from shareholder consents to the C short year return, drawing on the firm’s tax law practice, its entity selection and sale structuring work, and Chapter 11 sales.
Phillip Zagotti, JD/CPA, represents taxpayers before the IRS and the U.S. Tax Court and is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico. Owners weighing a filing can start with the firm’s guide to choosing a bankruptcy chapter in New Mexico. The firm works alongside New Mexico-licensed counsel on state-law questions. If a sale is on the calendar, contact North Star Law Firm before March 15, not after.