Northern Corporation, which designs construction accounting software, incorporated six years ago in Texas, with Steve and Susan Reid, husband and wife, owning all the Northern Corp. stock. Immediately thereafter, Northern made a subchapter S election effective for that year. Steve and Susan filed the necessary consents to the election. On March 10 of last year, Steve and Susan transferred 15% of the Northern Corp. stock to the Reid Family Trust, an irrevocable trust created three years earlier for the benefit of their two minor children, ages 10 and 13. Early in the current year, Steve and Susans tax accountant learned about the transfer and has advised the couple that the transfer of the stock to the trust may have terminated Northern Corp.s S corporation election.

In preparation for a meeting with Steve and Susan, prepare a memorandum indicating any action Steve and Susan can take that will permit Northern to retain its S election.