PLR 200031029: Late S election accepted without deciding trust shareholder eligibility

Plain-English summary

A corporation intended to be an S corporation from incorporation but discovered that its election had not been filed on time. Its stock was later transferred to a trust that appeared to be an ineligible shareholder. The IRS granted late-election relief under section 1362(b)(5) for the corporation's initial taxable year, contingent on filing Form 2553 within 60 days with the intended effective date and a copy of the ruling. The letter did not decide whether the trust was an eligible S corporation shareholder, whether the corporation otherwise qualified before or after the transfer, or whether any resulting termination was inadvertent. The ruling therefore resolves the filing delay only.

Ruling snapshot

• Question: Can the corporation's S election be treated as timely for its first taxable year despite the late filing?
• Outcome: Approved for the late election, contingent on filing Form 2553 as directed; trust eligibility and possible termination were left open.
• Key authorities: IRC §§ 1361 and 1362(a), (b), and (b)(5).

Full text (IRS public release)

Internal Revenue Service                        Department of the Treasury

Index Number:       U.I.L. No.: 1362.01-03      Washington, DC 20224



                                                Person to Contact:
Number: 200031029                               Telephone Number:
Release Date: 8/4/2000
                                                Refer Reply To:
                                                CC:DOM:P&SI:3 PLR-104039-00
                                                Date:
                                                May 2, 2000




Legend

Company             =


State               =

Husband             =


Wife                =


Trust               =



a                   =

b                   =


Dear

       This letter responds to a letter dated February 8, 2000, requesting a ruling on
behalf of Company under § 1362(b)(5) of the Internal Revenue Code.

       The information submitted discloses that Company was incorporated on a in
State. Company initially had two shareholders, Husband and Wife. It is represented
that Company intended to be an S corporation upon its incorporation. In b, however,
Company stock was transferred to the Trust, an apparent ineligible shareholder.
Therefore, had Company’s S election been timely filed, that transfer may have
terminated its election.
PLR-104039-00                               2


        Believing itself to be an S corporation, Company has operated accordingly since
a. After the end of its taxable year beginning on a, however, Company discovered that
its S election had not been timely filed.

      Company requests a ruling that its § 1362(a) election will be treated as timely
made for its taxable year that begins on a.

      Section 1362(a) provides that a small business corporation may elect to be an S
corporation.

       Section 1362(b) explains when an S election will be effective. Generally, if an S
election is made within the first two and one half months of a corporation's taxable year,
then that corporation will be treated as an S corporation for the year in which the election
is made. Section 1362(b)(3) provides that if an S election is made after the first two and
one half months of a corporation's taxable year, then that corporation will not
 be treated as an S corporation until the taxable year following the year in which the S
election is made.

       Section 1362(b)(5) provides that if no § 1362(a) election is made for any taxable
year, and the Secretary determines that there was reasonable cause for the failure to
timely make such election, then the Secretary may treat such an election as timely
made for such taxable year and § 1362(b)(3) shall not apply.

        Applying the relevant law to the facts submitted and representations made, we
rule that Company's § 1362(a) election will be treated as timely made for its taxable
year that begins on a. However, this ruling is contingent on Company filing Form 2553,
Election by a Small Business Corporation, with an effective date of a, with the
appropriate Service Center within 60 days from the date of this ruling. A copy of this
letter should be attached to the Form 2553.

       Except as specifically set forth above, we express no opinion concerning the
federal tax consequences of the foregoing facts. Specifically, we express no opinion on
whether the Trust qualifies as a valid S corporation shareholder under § 1361 or whether
Company otherwise qualifies as an S corporation before or after the transfer of
Company stock to the Trust. Moreover, we express no opinion on whether any
termination of Company’s S election upon the transfer of Company stock to Trust in b
constitutes an inadvertent termination, because Company requested no opinion on this
issue.
PLR-104039-00                               3


       This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

                                                Sincerely yours,


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


Enclosure:
      Copy for section 6110 purposes