PLR 200543009: Late S election allowed from start of operations

Plain-English summary

A corporation's shareholder wanted S corporation treatment, but the election was not filed on time. Although the shareholder originally wanted treatment from incorporation, the corporation requested relief effective when it began operations. The IRS found reasonable cause for the missed deadline and ruled that S status could begin on the operations date. The ruling depends on the corporation otherwise qualifying for S status and filing a completed Form 2553 with the ruling letter within 60 days. The IRS did not decide whether the corporation in fact meets all S corporation requirements.

Ruling snapshot

• Question: Could the late S election take effect when the corporation began operations?
• Outcome: Approved, subject to eligibility and a timely Form 2553 filing after the ruling.
• Key authorities: IRC § 1362(a), (b)(5).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200543009
Release Date: 10/28/2005
Index Number: 1362.01-03

Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:2 – PLR-107457-05
Date:
July 1, 2005

Legend

X = ----------------------
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State = -------------

Date 1 = -----------------------

Date 2 = ----------------------

Dear ------------------
This letter responds a letter dated January 14, 2005, submitted on behalf of X, requesting relief under § 1362(b)(5) of the Internal Revenue Code.

FACTS

X was incorporated on Date 1 under the laws of State and began operations on Date 2. The shareholder of X desired that X elect S corporation treatment effective Date 1, but the election to be treated as an S corporation was not timely filed. Accordingly, X requests a ruling that it will be treated as an S corporation effective Date 2.

LAW AND ANALYSIS

Section 1362(a) provides that a small business corporation may elect to be an S corporation. Section 1362(b) provides the rule on when an S election will be effective.

2

Section 1362(b)(2) provides that if an S election is made within the first two and one-half months of a corporation's taxable year, then the corporation will be treated as an S corporation for the year in which the election is made. Under § 1362(b)(3), however, if an S election is made after the first two and one-half months of a corporation's taxable year, then that corporation will not be treated as an S corporation until the taxable year after the year in which the S election is filed.

Section 1362(b)(5) provides that if: (1) no §1362(a) election is made for any taxable year, and (2) 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.

X did not timely make an election to be treated as an S corporation under § 1362(a). X has, however, established reasonable cause for not making a timely S election and is entitled to relief under § 1362(b)(5).

CONCLUSION

Based solely on the facts submitted and the representations made, and provided that X otherwise qualifies as an S corporation, we conclude that X will be treated as an S corporation effective Date 2, provided that within 60 days from the date of this letter, X submits a properly completed Form 2553, Election by a Small Business Corporation, with a copy of this letter attached, to the relevant service center.

Except as specifically set forth above, no opinion is expressed or implied as to the federal income tax consequences of the transaction described above under any other provision of the Code. Specifically, no opinion is expressed concerning whether X is, in fact, an S corporation for federal tax purposes.

3

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.

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,

Beverly Katz
Senior Technician Reviewer, Branch 2
Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures (2)
Copy of this letter
Copy for § 6110 purpose--s