PLR 200006043: Missed first year S election receives conditional relief

Plain-English summary

A corporation's two shareholders intended S corporation treatment from its first tax year. Its attorneys and accountants each believed the other would file Form 2553, so the election was missed, although the corporation and shareholders filed tax returns consistent with S status. The IRS found reasonable cause for the late election under section 1362(b)(5). It ruled that the election for the first year would be treated as timely if the corporation filed a completed Form 2553 within 60 days of the letter and attached a copy of the ruling. The IRS did not decide whether the corporation otherwise met the definition of a small business corporation.

Ruling snapshot

• Question: Can the corporation's missed S election take effect for its first tax year?
• Outcome: Approved, conditioned on filing Form 2553 within 60 days
• Key authorities: IRC §§ 1362(b)(5) and 1361(b)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Index Number: 1362.01-03 Washington, DC 20224

Number: 200006043
Person to Contact:
Release Date: 2/11/2000
Telephone Number:

Refer Reply To:
CC:DOM:P&SI:2 - PLR-112300-99
Date:
November 16, 1999

X =

A =

B =

D1 =

Year 1 =

Dear
:
This letter responds to a letter dated June 28, 1999, and subsequent correspondence, submitted on behalf of X by its authorized representative, requesting a ruling under § 1362(b)(5) of the Internal Revenue Code.

The information submitted states that X was incorporated on D1 of Year 1. A and B, the sole shareholders of X, represent that they intended that X elect to be an S corporation beginning Year 1, its first taxable year. X’s Form SS-4, Application for Employer Identification Number, and X’s Consent of Directors to Action Without a Formal Organizational Meeting indicate that X intended to be an S corporation. A, as X’s president, represents that X relied on its advisors to file an S corporation election for X. However, the attorneys and the accountants each thought that the other group would prepare and file a Form 2553, Election by a Small Business Corporation, on behalf of X. Due to the confusion, a Form 2553 was not filed timely for X for Year 1. For Year 1, X filed Form 1120S, U.S. Income Tax Return for an S Corporation, for X. A and B filed Form 1040, U.S. Individual Income Tax Return, consistent with X being an S corporation.

Section 1362(b)(5) of the Code provides that if -- (A) an

-2-
Ms. Debra A. Horvath
election under § 1362(a) is made for any taxable year after the
date prescribed by § 1362(b)
such election for such
taxable year or no such election is made for any taxable year, and (B) the Secretary determines that there was reasonable cause for the failure to timely make such election, the Secretary may treat such an election as timely made for such taxable year.

Based solely on the facts and the representations submitted, we conclude that X has established reasonable cause for failing to make a timely election to be an S corporation for X's first taxable year. Accordingly, provided that X makes an election to be an S corporation by filing a completed Form 2553 with the appropriate service center effective for its Year 1 taxable year, within 60 days following the date of this letter, then such election will be treated as timely made for X's Year 1 taxable year. A copy of this letter should be attached to the Form 2553.

Except as specifically set forth above, no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the Code, including whether X was or is a small business corporation under § 1361(b) of the Code.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code 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 is being sent to X’s authorized representative.

Sincerely yours,

H. GRACE KIM
Assistant to the Chief
Branch 2
Office of the Assistant
Chief Counsel
(Passthroughs and
Special Industries)

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