PLR 200334035: Early S corporation reelection permitted after revocation

Plain-English summary

A corporation's former shareholders revoked its S corporation election. Its new shareholders, who were unrelated to those shareholders, wanted to make a new election before the usual five-year waiting period ended. Section 1362(g) allows an earlier election with the IRS's consent. The IRS found that the corporation met its burden under the regulation and granted permission to reelect S corporation status on the requested effective date. It did not decide whether the corporation otherwise met all S corporation eligibility requirements.

Ruling snapshot

• Question: Could the corporation make a new S election before the five-year waiting period expired?
• Outcome: Approved, effective on the requested redacted date.
• Key authorities: IRC § 1362(g); Treas. Reg. § 1.1362-5(a).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200334035
Washington, DC 20224
Release Date: 8/22/2003
Index Number: 1362.01-03 Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:2 - PLR-120605-03
Date:
May 22, 2003

X
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A
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B
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C
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D
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E
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F
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D1 =

D2 =

D3 =

D4 =

D5 =

Dear
:

This letter responds to a letter, dated March 14, 2003, and subsequent correspondence, submitted on behalf of X by its authorized representative, requesting a ruling under § 1362(g) of the Internal Revenue Code.
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PLR-120605-03

The information submitted states that X was incorporated in D1, and elected to be an S corporation, effective D2. On D3 the shareholders of X revoked X’s S election. The current shareholders of X are A, B, C, D, E, and F who acquired their shares of X on D4. The current shareholders are unrelated to any of the shareholders at the time of the revocation. The current shareholders desire for X to be an S corporation and request permission for X to reelect to be an S corporation, effective D5. D5 is prior to the five-year waiting period imposed by § 1362(g).

Section 1362(a) provides that except as provided in § 1362(g), a small business corporation may elect to be an S corporation.

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated whenever (at any time on or after the 1st day of the 1st taxable year for which the corporation is an S corporation) such corporation ceases to be a small business corporation.

Section 1362(g) provides that if a small business corporation has made an election under § 1362(a) and if such election has been terminated under § 1362(d), the corporation (and any successor corporation) shall not be eligible to make an election under § 1362(a) for any taxable year before its fifth taxable year which begins after the first taxable year for which the termination is effective, unless the Secretary consents to the election.

Section 1.1362-5(a) of the Income Tax Regulations provides that absent the Commissioner's consent, an S corporation whose election has terminated (or a successor corporation) may not make a new election for five taxable years as described in section § 1362(g). The Commissioner, however, may permit the corporation to make a new election before the 5-year period expires. The corporation has the burden of establishing that under the relevant facts and circumstances, the Commissioner should consent to a new election. The fact that more than 50 percent of the stock in the corporation is owned by persons who did not own any stock in the corporation on the date of the termination tends to establish that consent should be granted.

Based solely on the representations made and on the information submitted, we conclude that X has met its burden under § 1.1362-5(a). We grant permission for X to reelect to be an S corporation, effective D5. A copy of this letter should be attached to X's next federal income tax return.

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 S corporation eligibility requirements.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
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In accordance with the power of attorney on file with this office, a copy of this letter is being sent to X’s authorized representative.

Sincerely yours,
Carolyn Hinchman Gray
Senior Counsel
Branch 2
Associate Chief Counsel
(Passthroughs and Special Industries)

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