PLR 200118029: Late S corporation election may take effect from incorporation

Plain-English summary

A newly incorporated company and its sole shareholder intended S corporation status from the start of the company's first tax year, but the election was not filed on time. The IRS found reasonable cause for the missed deadline under section 1362(b)(5). It ruled that the company would be recognized as an S corporation from that start date if it otherwise qualified and the shareholder made any necessary federal income tax return adjustments. The company had to file Form 2553, with the ruling attached, within 60 days of the letter. The IRS did not decide whether the company otherwise met the S corporation eligibility rules.

Ruling snapshot

• Question: Can the company's late S election take effect from the start of its first tax year?
• Outcome: Approved, subject to eligibility, shareholder return adjustments, and a Form 2553 filing within 60 days.
• Key authorities: IRC § 1362(a), (b)(5).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200118029
Washington, DC 20224
Release Date: 5/4/2001
Index Number: 1362.01-03
Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:Br.3-PLR-126023-00
Date:
February 2, 2001

Legend

X
=

D1
=

State =

Shareholder =

Dear

This responds to your representative’s letter dated November 8, 2000, written on behalf of X, requesting a ruling that X's S corporation status will be effective as of D1.

FACTS

X incorporated under State law on D1. X's Shareholder intended that X be a subchapter S corporation for its tax year beginning D1. However, the S corporation election under § 1362 of the Internal Revenue Code was not filed timely.

X requests a ruling that it will be recognized as a subchapter S corporation effective D1 pursuant to § 1362(b)(5).

LAW AND ANALYSIS

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

Section 1362(b) provides the rule on when a subchapter S election will be effective. If a subchapter 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 a subchapter S corporation for the year in which the election is made. If a subchapter 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 a subchapter S corporation until the taxable year after 2
PLR-126023-00

the year in which the subchapter S election is made.

Section 1362(b)(5) provides that if: (1) no § 1362(a) election is made for any taxable year, and (2) 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 effective as of the first day of that taxable year.

X's subchapter S corporation election was not filed timely for the election to be effective as of its taxable year beginning on D1. Nevertheless, X has established reasonable cause for not making a timely election and is entitled to relief under § 1362(b)(5).

CONCLUSIONS

Based solely on the facts submitted and representations made, and assuming that X otherwise qualifies as a subchapter S corporation as of D1, and X's Shareholder makes any adjustments to his federal income tax returns necessary to comply with this ruling, we conclude that X will be recognized as a subchapter S corporation effective for the period beginning on D1. Please file a completed Form 2553, Election By A Small Business Corporation, (with a copy of this ruling attached) reflecting X’s election of subchapter S corporation status as of D1, with the applicable service center within 60 days from the date of this letter.

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. Specifically, no opinion is expressed concerning whether X otherwise satisfies the subchapter S corporation eligibility requirements.

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.

Pursuant to a power of attorney on file with this office, we are sending a copy of this letter to X’s authorized representative.

Sincerely,
Mary Beth Collins
Assistant to the Branch Chief, Branch 3
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosures (2)
Copy of this letter
Copy for § 6110 purposes