PLR 200306032: Late S election allowed with return filing condition

Plain-English summary

Two shareholders intended their new company to be an S corporation from its incorporation date, but the advisers they retained failed to file Form 2553. The IRS found reasonable cause for the missed deadline under § 1362(b)(5). It allowed the election to be treated as timely if the company filed a completed Form 2553 within 60 days of the letter, using the intended redacted effective date. The company also had to file Form 1120S for two specified taxable years within that same 60-day period. The IRS did not decide whether the company otherwise qualified as an S corporation.

Ruling snapshot

• Question: May the company make a late S election effective from incorporation?
• Outcome: Approved, subject to filing the election and two returns within 60 days.
• Key authorities: IRC § 1362(a), (b)(3), and (b)(5).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200306032
Washington, DC 20224
Release Date: 02/7/2003
Index Number: 1362.01-03
Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:B03-PLR-151839-02
Date:
November 5, 2002

Legend

X =

A =

B =

d1 =

d2 =

d3 =

State =

Dear
:

This letter responds to a letter dated September 4, 2002, written on behalf of X by X’s authorized representative, requesting a ruling under § 1362(b)(5) of the Internal Revenue Code.

FACTS

The information submitted provides that X was incorporated under State law on d1. A and B, X’s sole shareholders, intended for X to be treated as an S corporation from d1. The minutes of the organizational meeting for X indicate that it was intended that X would elect to be an S corporation. X retained an attorney and an accountant to 2 PLR-151839-02

aid with its incorporation and S election. However, the tax advisors retained by X failed to file a Form 2553, Election by a Small Business Corporation.

LAW AND ANALYSIS

Section 1362(a)(1) provides that, except as provided in § 1362(g), a small business corporation may elect to be an S corporation. Section 1362(b)(1) provides that such election shall be effective for the current taxable year if it is made during the preceding taxable year or before the 15th day of the third month of the current taxable year. Section 1362(b)(3) provides that an election made after the 15th day of the third month of the current taxable year shall be treated as having been made for the following taxable year.

Section 1362(b)(5) provides that if an election under § 1362(a) is made for any taxable year (determined without regard to § 1362(b)(3)), 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 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 § 1362(b)(3) shall not apply).

CONCLUSION

Based on the facts submitted and representations made, we conclude that X has established reasonable cause for failing to make a timely S election. Thus, we conclude that X is eligible for relief under § 1362(b)(5). Accordingly, if X makes an election to be an S corporation by filing with the appropriate service center a completed Form 2553, containing an effective date of d1, within 60 days of the date of this letter, then such election shall be treated as timely made for X’s taxable year beginning d1. A copy of this letter should be attached to the Form 2553 filed with the service center. In addition, X must file a Form 1120S, U.S. Income Tax Return for an S Corporation, for its d2 taxable year and d3 taxable year with the appropriate service center no later than 60 days from the date of this letter.

Except as specifically set forth above, we express or imply no opinion concerning the federal tax consequences of this case under any other provision of the Internal Revenue Code. Specifically, we express or imply no opinion on whether X is eligible to be an S corporation.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. 3 PLR-151839-02

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

Sincerely yours,

/s/

James A. Quinn
Senior Counsel, Branch 3
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures (2)
Copy of this Letter
Copy for §6110 purposes