PLR 200101025: Late S election allowed for corporation's second tax year

Plain-English summary

A corporation planned to remain inactive in its first short tax year and elect S corporation status for the next year. Its advisors failed to file Form 2553 because of a breakdown in communication about who would prepare and submit it. The IRS found reasonable cause for the missed deadline and ruled that an election effective for the second tax year would be treated as timely if the corporation filed Form 2553 within 60 days of the letter. The IRS did not decide whether the corporation otherwise met the S corporation eligibility requirements.

Ruling snapshot

• Question: Could the corporation's late S election take effect for its second tax year?
• Outcome: Approved, provided Form 2553 was filed within 60 days.
• Key authorities: IRC §§ 1362(b)(5), 1361(b).

Full text (IRS public release)

INTERNAL REVENUE SERVICE

Number: 200101025
Release Date: 1/5/2001
Index No.: 1362.01-03

CC:PSI:2 - PLR-111273-00
October 5, 2000

X =

A =

B =

C =

D =

E =

F =

G =

D1 =

D2 =

Year 1 =

Year 2 =
Dear

This responds to a letter dated June 1, 2000, submitted by X’s authorized representative on behalf of X, 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. The shareholders of X are A, B, C, D, E, F, and G. A, as X's president, represents that X relied on its professional advisors to prepare the necessary documents for purposes of obtaining X’s S corporation status. However, the Form 2553, Election by a Small Business Corporation, for X was not filed as a result of a breakdown in communication as to who would prepare and file it. A represents that the shareholder’s of X had intended X to be an inactive corporation for its first short tax year, Year 1, and that the S election would be effective on D2 of Year 2.
 -2-

. Section 1362(b)(5) of the Code provides that if--(A) an election under § 1362(a) is made for any taxable year after the date prescribed by § 1362(b) for making 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 effective for X's tax year beginning D2 of Year 2. Accordingly, provided that X makes an election to be an S corporation by filing a Form 2553 with the appropriate service center effective for its Year 2 taxable year, within 60 days following the date of this letter, then such election will be treated as timely made for X's Year 2 taxable year. A copy of this letter should be attached to the Form 2553.

Except as specifically ruled upon above, no opinion is expressed concerning the federal tax consequences of the facts described above under any other provisions 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 the power of attorney on file with this office a copy of this letter is being sent to X’s authorized representative.

Sincerely yours,
.THOMAS HINES
Acting Branch Chief, Branch 2
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)

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