H, a US citizen, died on February 1, 2016, survived by his spouse and adult children from a first marriage (who are all US citizens). H incorporated XYZ Corp in 1999 and elected federal and NYS S corporation status. In 2002, D transferred his shares of stock in XYZ Corp to his revocable trust. Upon his death, 60% of the shares of stock in XYZ Corp held in his revocable trust passed to a trust for his spouse (the “Marital Trust”) and the balance of the shares of XYZ Corp passed to separate trusts for each of his children (each, a “Child’s Trust”). Both the Marital Trust and each of the Child’s Trusts provide that the trust beneficiary will receive all trust income with discretionary distributions of trust principal. Since H’s date of death, you have filed tax returns for XYZ Corp with Schedule K-1s that indicate that the Marital Trust and each of the Child’s Trusts are the shareholders.

In September 2020, the shareholders of XYZ Corp agreed to sell all of their shares of stock to ABC Company and the parties wish to make a Section 338(h)(10) election. During the course of due diligence, the parties have been asked to confirm the validity of XYZ Corp’s status as an S corporation. The only documentation in your file is a copy of the IRS and NYS acknowledgement and acceptance of H’s S corporation election in 1999. ABC has questioned whether there is any S corporation documentation, i.e, elections or the like, concerning the transfer of ownership of the stock from H to H’s revocable trust in 2002, and then from H’s revocable trust to the Marital Trust and each of the Child’s Trusts after H’s death in 2016.

REQUIRED: Prepare a memorandum answering:

1. Whether XYZ Corp’s S election was valid (a) upon the transfer of H’s shares to his revocable trust and (b) upon transfer after his death from his revocable trust to the Marital Trust and Child’s Trust assuming no additional elections or filings were made at either point in time.

2. If XYZ’s election is not valid, why not? and what, if anything, can be done to fix it?