PLR 200004028: Corporation may make an S election before the five year waiting period ends

Plain-English summary

Ten related corporations, including one S corporation, merged into a C corporation. The surviving corporation asked for consent to make an S election before the five year waiting period in § 1362(g) expired. Based on the facts presented, the IRS granted consent for the election to take effect on the redacted date. The letter does not decide whether the surviving corporation meets the separate eligibility requirements for an S corporation.

Ruling snapshot

• Question: May the surviving corporation elect S status before the § 1362(g) waiting period expires?
• Outcome: Approved: consent to elect S status effective on the stated date, subject to eligibility requirements that were not decided.
• Key authorities: IRC §§ 1362(g), 1361(b); Treas. Reg. § 1.1362-5.

Full text (IRS public release)

Internal Revenue Service                       Department of the Treasury

Index Number: 1362.01-02                       Washington, DC 20224

                                               Person to Contact:
Number: 200004028                              Telephone Number:
Release Date: 1/28/2000
                                               Refer Reply To:
                                               CC:DOM:P&SI:3 PLR-114545-99
                                               Date:
                                               November 1, 1999

LEGEND:

X              =

Y              =

D1             =

D2             =

      This letter responds to a letter dated July 19, 1999, written on behalf of X,
requesting a ruling under § 1362(g) of the Internal Revenue Code Regulations that X be
granted consent to make a subchapter S election prior to the termination of the five-
year waiting period imposed by § 1362(g).

                                        FACTS

        According to the information submitted, X and Y were two of eleven corporations
owned by six related shareholders. On D1, ten of the corporations were merged into X
in a § 368(a)(1)(A) reorganization. All of the corporations were C corporations, except
 Y which was an S corporation. The value of Y‘s assets is approximately 3 percent of
total value of X after the merger.

                                 LAW AND ANALYSIS

      Section 1362(g) of the Code provides that if a small business corporation has
made an election under § 1362(a) and if the election has been terminated under §
1362(d), the corporation (and any successor corporation) shall not be eligible to make
an election under § 1362(a) for any taxable year before its 5th taxable year which begins
after the 1st taxable year for which the termination is effective, unless the Secretary
consents to the election.

       Section 1.1362-5(b) of the regulations defines a successor corporation as a
corporation where (1) 50 percent or more of the stock of the corporation (the new
corporation) is owned, directly or indirectly, by the same persons who, on the date of
the termination, owned 50 percent or more of the stock of the corporation whose
election terminated (the old corporation); and (2) either the new corporation acquires a
substantial portion of the assets of the old corporation, or a substantial portion of the
assets of the new corporation were assets of the old corporation.

       Section 1.1362-5(a) of the regulations provides that the Commissioner may
permit the corporation to make a new election before the 5-year period expires. The
corporation has the burden of establishing that under the relevant facts and
circumstances, the Commissioner should consent to a new election. The fact that more
than 50 percent of the stock in the corporation is owned by persons who did not own any
stock in the corporation on the date of the termination tends to establish that consent
should be granted. In the absence of this fact, consent ordinarily is denied unless the
corporation shows that the event causing termination was not reasonably within the
control of the corporation or shareholders having a substantial interest in the corporation
and was not part of a plan on the part of the corporation or of such shareholders to
terminate the election.

       In discussing the predecessor of the § 1362(g) of the Code, the legislative history
of the Technical Amendments Act of 1958 indicates that the purpose of the provision is
to prevent a corporation from electing in and out of subchapter S. S. Rep. No. 1983,
85th Cong., 2d Sess. 89 (1958), 1958-3 C.B. 922, 1010.

                                     CONCLUSIONS

        Therefore, based on the facts as presented in this ruling request, and viewed in
light of the applicable law and regulations, consent is granted for X to elect to be an S
corporation effective D2. A copy of this letter should be attached to X’s next federal
income tax return. A copy of this letter is enclosed for that purpose.

       Except for the specific rulings above, no opinion is expressed or implied
concerning the federal income tax consequences of the facts of this case under any
other provision of the Code. Specifically, no opinion is expressed regarding X’s eligibility
as a small business corporation under § 1361(b) to make the election under
 § 1362(a).
      This ruling is directed only to the taxpayer on whose behalf it was requested.
Section 6110(j)(3) provides that it may not be used or cited as precedent.

       Pursuant to a power of attorney on file with this office, a copy of this letter will be
sent to X.

                                                   Sincerely yours,

                                                   William P. O’Shea
                                                   Chief, Branch 3
                                                   Office of the Assistant Chief
                                                   Counsel
                                                   (Passthroughs and Special
                                                   Industries)

Enclosures: 2
      Copy of this letter
      Copy for § 6110 purposes