PLR 200041015: Corporation may reelect S status before five years expire

Plain-English summary

A corporation revoked its S corporation election and later sought to elect S status again before the usual five-year waiting period ended. After the termination, a new shareholder who held no stock at the time of termination acquired more than half of the corporation's stock. Under section 1362(g) and its regulations, that change in ownership supported the request. The IRS consented to a new election effective on the requested date but did not decide whether the corporation was otherwise eligible for S status.

Ruling snapshot

• Question: Could the corporation make a new S election before the five-year waiting period expired?
• Outcome: Approved: permission to elect effective on the requested date.
• Key authorities: IRC §§ 1361(b)(1), 1362(g); Treas. Reg. § 1.1362-5(a).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Index Number: 1362.01-02 Washington, DC 20224

Number: 200041015
Person to Contact:
Release Date: 10/13/2000
Telephone Number:

Refer Reply To:
CC:PSI:2 - PLR-106761-00
Date:
July 11, 2000
X =

A =

D1 =

D2 =

D3 =

D4 =

D5 =

y =

Dear
:
This letter responds to a letter dated March 14, 2000 , and subsequent correspondence, written on behalf of X, requesting a ruling under § 1362(g) of the Internal Revenue Code.

The information submitted states that X elected to be an S corporation effective for its taxable year beginning D1. In D2, X revoked its S election effective as of D3. On D4, A acquired y shares of X stock from X, which represent more than 50 percent of the issued and outstanding stock of X. A did not own any shares of stock in X on the date of the termination of X’s S corporation election. A, as X’s vice-president, represents that X meets the criteria of a small business corporation under § 1361(b)(1).

X is requesting permission to reelect to be an S corporation effective D5, prior to the termination of the five-year waiting period imposed by § 1362(g).

Section 1362(g) provides that, if a small business corporation has made an election under § 1362(a) and if such election has been terminated under § 1362(d), the corporation (and any successor corporation) is not eligible to make an election under § 1362(a) for any taxable year before its fifth taxable year which begins after its first taxable year for which

-2-
Mr. Harry E. Peden III
the termination is effective, unless the Secretary consents to the election.

Section 1.1362-5(a) of the Income Tax Regulations provides that 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.

Based solely on the information submitted, and the representations made, permission is granted to X to elect to be an S corporation effective D5.
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. In particular, no opinion is expressed or implied regarding X’s eligibility to elect to be an S corporation.

A copy of this letter should be attached to X’s federal income tax return for its taxable year for which the S corporation election is accepted as timely filed. A copy of this letter is being sent to X for that purpose.
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.

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