PLR 200121056: Shareholder resolution supports a late S election

Plain-English summary

A newly formed corporation's shareholders intended it to be an S corporation, but its Form 2553 election was not filed on time. Their resolution stated that the company would elect S status, and a later buyer of some shares believed he was buying into a valid S corporation. The IRS found reasonable cause for the missed election under IRC § 1362(b)(5). It ruled that the election would be treated as timely for the stated tax year if the corporation filed a completed Form 2553 within 60 days of the letter. The IRS did not decide whether the company otherwise qualified as a small business corporation.

Ruling snapshot

• Question: May the corporation's late S election be treated as timely for its first stated tax year?
• Outcome: Approved conditionally, if a completed Form 2553 is filed within 60 days.
• Key authorities: IRC § 1362(b)(5).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200121056
Washington, DC 20224
Release Date: 5/25/2001
Index Number: 1362.00-00
Person to Contact:

Telephone Number:

Refer Reply To:
CC:P&SI:2-PLR-132559-00
Date:
February 26, 2001

Legend

X:

A:

B:

C:

D:

D1:

D2:

D3:

Year 1:

Dear :

This letter responds to your letter dated December 6, 2000, submitted on behalf of X, requesting a ruling under § 1362(b)(5) of the Internal Revenue Code.

The represented facts are as follows: X was incorporated on D1. A, B and C, the initial shareholders of X, intended X to be an S corporation effective for the Year 1 taxable year, but Form 2553, Election by a Small Business Corporation, was not filed timely. This intent is evidenced by a resolution of the shareholders of X, dated D2 of Year 1, which states that X will elect to be taxed under subchapter S. On D3, C sold some stock to D who thought he was acquiring stock in a valid S corporation. Accordingly, X requests a ruling that it will be treated as an S corporation effective D1.

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)

2

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 Year 1 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 forwarded to X.

Sincerely yours,
J. Thomas Hines
Chief, Branch 2
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosures: 2
Copy of this letter
Copy for § 6110 purposes