PLR 200140036: Late S election allowed from start of business

Plain-English summary

A business's shareholders intended to elect S corporation treatment from the date it began operating, but the election was not filed on time. The IRS found reasonable cause for the missed deadline under § 1362(b)(5). It agreed to recognize S corporation status from the intended date if the business otherwise qualified and filed a completed Form 2553 within 60 days of the ruling letter. The ruling addressed the late filing and did not resolve other tax consequences.

Ruling snapshot

• Question: Could the missed S election take effect when the business began operating?
• Outcome: Approved: late election relief was granted, subject to eligibility and filing.
• Key authorities: IRC § 1362(a), (b)(5).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200140036
Washington, DC 20224
Release Date: 10/5/2001
Index Number: 1362.01-03
Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:Br.1 - PLR-119104-01
Date:
July 3, 2001

Legend:

X =

State =

D1 =

This responds to your letter dated February 15, 2001, submitted on behalf of X requesting relief under section 1362(b)(5) of the Internal Revenue Code.

FACTS

X began doing business under State law on D1. The shareholders of X intended that X elect to be treated as an S corporation effective D1. However, the election to be treated as an S corporation was not timely filed.

LAW AND ANALYSIS

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

Section 1362(b) provides when an S election becomes effective. 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 was made. If an election is made after the first two and one-half months of a corporation’s taxable year, then the corporation will generally not be treated as an S corporation until the following taxable year.

However, section 1362(b)(5) provides that if no election is made pursuant to section 1362(a), or if the election is made after the date prescribed for making such an election, and the Secretary determines reasonable cause existed for the failure to 2 PLR-119104-01

timely make the election, then the Secretary can treat such an election as timely made for that taxable year and effective as of the first day of that taxable year.

In the present case, X failed to timely elect S corporation treatment effective D1.
However, X has established reasonable cause for not making a timely election and is thus entitled to relief under section 1362(b)(5).

CONCLUSION

Based solely on the facts submitted and representations made, and provided that X otherwise qualifies as a subchapter S corporation, we conclude that X will be recognized as an S corporation effective D1. Within 60 days from the date of this letter, X should submit a properly completed Form 2553, with a copy of this letter attached, to the relevant service center.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

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

Sincerely,
/s/ David R. Haglund
Senior Technician Reviewer, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures (2):
Copy of this letter
Copy for section 6110 purposes