1. Cato Corporation incorporated on July 1, 2004, in California, with Tim and Elesa, husband and wife, owning all the Cato stock. On August 15, 2004, Cato made an S election effective for 2004. Tim and Elesa filed the necessary consents to the election. On March 10, 2008, Tim and Elesa transferred 15% of the Cato stock to the Reid and Susan Trust, an irrevocable trust created three years earlier for the benefit of their two minor children. In early 2009, Tim and Elesas tax accountant, Susan, learns about the transfer and feels that that the transfer of the stock to the trust may have terminated Catos S election. Tim and Elesas business was handled by Susans manager last year and probably wouldnt be too pleased if Susan were to second guess her. Susan is wondering whether she should raise the issue with her manager and client or whether she should just remain silent.
   1. Are there any ethical issues that concern you in this situation?
   2. Is Catos S election terminated?
   3. What advice would you give Susan, Tim and Elesa?

Support your opinion with relevant tax authorities (code, reg, rev ruls, rev procs, court cases etc.) wherever necessary.