PLR 200247005: Late entity election and conditional S corporation relief

Plain-English summary

An S corporation converted into a state law limited partnership and later converted back into a corporation. It intended the partnership to be taxed as a corporation but inadvertently failed to file Form 8832. The IRS granted 60 days to file the entity classification election effective on the conversion date. It also ruled that, if the partnership conversion created a second class of stock and ended the S election, that termination was inadvertent and S status would continue under section 1362(f), provided no other termination occurred. The IRS did not decide whether the original S election was valid or whether the partnership in fact had more than one class of stock.

Ruling snapshot

• Question: Can the partnership file a late corporate classification election and preserve S status if the conversion inadvertently terminated it?
• Outcome: Approved: 60-day filing relief and conditional inadvertent termination relief.
• Key authorities: IRC §§ 1361(b)(1)(D), 1362(f); Treas. Reg. §§ 301.7701-3, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200247005
Washington, DC 20224
Release Date: 11/22/2002
Index Number: 9100.31-00, 1362.04-00 Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:2-PLR-127463-02
Date:
August 5, 2002

X
=

LP =

Date 1 =
Date 2 =
Date 3 =
Date 4 =
Year 1 =
State =

Dear
:

This responds to your representative’s letter dated May 14, 2002, together with subsequent correspondence, requesting a ruling that LP be given an extension of time under § 301.9100-3 of the Procedure and Administration Regulations to elect to be treated as an association taxable as a corporation for federal tax purposes for its taxable year beginning Year 1 and be granted relief under § 1362(f) of the Internal Revenue Code.

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FACTS

X was incorporated under State law on Date 1, and elected to be treated as an S corporation effective on Date 2. On Date 3, X converted to a limited partnership, LP, under State law. LP intended to be classified as an association taxable as a corporation. However, due to inadvertence, no Form 8832, Entity Classification Election, was filed for LP. X represents that, if LP is classified as an association taxable as a corporation, then this conversion would qualify as a reorganization under § 368(a)(1)(F).

On Date 4, LP converted back to a State corporation. X represents that, if LP is treated as an association taxable as a corporation, then this conversion would qualify as a reorganization under § 368(a)(1)(F). X represents that it did not intend to terminate its S corporation election. X and its shareholders agree to make any adjustments consistent with the treatment of X as an S corporation as may be required by the Secretary.

LAW AND ANALYSIS

Section 301.7701-3(a) provides that a business entity that is not classified as a corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) (an “eligible entity”) can elect its classification for federal tax purposes. A “business entity” is an entity recognized for federal tax purposes that is not properly classified as a trust under § 301.7701-4 or otherwise subject to special treatment under the Code. Section 301.7701-2(a). An eligible entity with at least two members can elect to be classified as either an association (and thus a corporation under § 301.7701-2(b)(2)) or a partnership.

Section 301.7701-3(b)(1)(i) provides that unless a domestic eligible entity elects otherwise, the entity is a partnership if it has two or more members.

To elect to be classified other than as provided in § 301.7701-3(b), an eligible entity must file Form 8832, Entity Classification Election, with the designated service center. Section 301.7701-3(c)(1)(i). An election can be effective on the date specified on the Form 8832 or on the date filed if no such date is specified. The effective date specified on the Form 8832 cannot be more than 75 days prior to the date the election is filed. Section 301.7701-3(c)(2)(iii).

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §301.9100-3 to make a regulatory election. Section 301.9100-1(b) defines a regulatory election as an election whose due date is prescribed by a regulation published in the Federal Register, or in a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.

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Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make an election. Section 301.9100-1(a).

Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 provides extensions of time for making elections that do not meet the requirements of § 301.9100-2.

Requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the Government. Section 301.9100-3(a).

Section 1361(a)(1) defines an S corporation as a small business corporation for which an election under § 1362(a) is in effect. Section 1361(b)(1) defines “small business corporation” as a domestic corporation that is not an ineligible corporation and that does not (A) have more than 75 shareholders, (B) have as a shareholder a person (other than an estate, other than a trust described in § 1361(c)(2), and other than an organization described in (c)(6)) who is not an individual, (C) have a nonresident alien as a shareholder, and (D) have more than one class of stock.

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated whenever (at any time on or after the first day of the taxable year for which the corporation is an S corporation) the corporation ceases to be a small business corporation. The termination is effective on and after the day of the cessation. Section 1362(d)(2)(B).

Section 1362(f), in relevant part, provides that, if: (1) an election under § 1362(a) by any corporation was terminated under § 1362(d); (2) the Secretary determines that the termination was inadvertent; (3) no later than a reasonable period of time after discovery of the event resulting in the termination, steps were taken so that the corporation is once more a small business corporation; and (4) the corporation, and each person who was a shareholder in the corporation at any time during the period specified pursuant to § 1362(f), agrees to make any adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to such period, then, notwithstanding the terminating event, the corporation shall be treated as continuing to be an S corporation during the period specified by the Secretary.

Based on Rev. Proc. 99-51, 1999-52 I.R.B. 760, Section 5.04 of Rev. Proc.
2002-3, 2002-1 I.R.B. 125, provides that the Service will not rule on the following issue because it is being studied: whether a state law limited partnership electing under
§ 301.7701-3 to be classified as an association taxable as a corporation has more than one class of stock for purposes of 1361(b)(1)(D). Rev. Proc. 2002-3 also provides that

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the Service will treat any request for a ruling whether a state law limited partnership is eligible to elect S corporation status as a request for a ruling on whether the partnership complies with § 1361(b)(1)(D).

CONCLUSIONS

Based solely on the facts and the representations submitted, we conclude that the requirements of § 301.9100-3 have been satisfied. As a result, LP is granted an extension of time to elect to be treated as an association as of Date 3. LP has 60 days from the date of this letter to file Form 8832 with the applicable service center to elect to be treated as an association for federal tax purposes as of Date 3.

Further, we conclude that if X’s conversion from a State corporation to a State limited partnership created a second class of stock and thereby terminated X’s S corporation election, then the termination was inadvertent within the meaning of § 1362(f). Pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S corporation from Date 3 and thereafter, provided that X’s subchapter S election is not otherwise terminated under § 1362(d).

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 the original election made by X to be treated as an S corporation was a valid election under § 1362.

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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your first and second authorized representatives.

Sincerely,

William P. O’Shea
Acting Associate Chief Counsel
(Passthroughs and Special Industries)

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