PLR 200602014: Inadvertent loss of S corporation eligibility excused

Plain-English summary

A corporation elected S status, later became ineligible, and then regained eligibility. It and its shareholders had continued to file as though the S election remained in effect and agreed to make any tax adjustments the IRS required. The IRS treated the termination as inadvertent and allowed the corporation to continue as an S corporation, provided the election was not otherwise terminated. The letter's facts say the corporation became ineligible in one redacted year and eligible again in a later year, but its conclusion assigns the termination to the later year; that timing is unclear in the public release. The IRS gave no opinion on whether the corporation otherwise qualified for S status.

Ruling snapshot

• Question: Could S status continue after the corporation temporarily became ineligible?
• Outcome: Approved inadvertent termination relief, subject to no other termination.
• Key authorities: IRC §§ 1361(b), 1362(d), 1362(f).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200602014
Third Party Communication: None
Release Date: 1/13/2006
Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B01
PLR-128840-05
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Date: September 27, 2005

Legend:

X = -----------------------
------------------------------------

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

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

Year 1 = ------

Year 2 = ------

Dear --------------:

This responds to your letter dated May 12, 2005, submitted on behalf of X, requesting relief under § 1362(f) of the Internal Revenue Code.

Facts

X was formed on Date 1 and made an election to be treated as an S corporation effective Date 2. X became an ineligible corporation in Year 1 and once again became an eligible corporation in Year 2.

X represents that at all relevant times, X and its shareholders treated X as an S corporation and filed their tax returns accordingly. X and its shareholders agree to make any adjustments required by the Secretary consistent with the treatment of X as an S corporation.

Law and Analysis
PLR-128840-05
2

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 a “small business corporation” as a domestic corporation which is not an ineligible corporation which does not (A) have more than 75 shareholders, (B) have as a shareholder a person (other than an estate and other than a trust described in subsection (c)(2)) who is not an individual, (C) have a nonresident alien as a shareholder, and (D) have more than 1 class of stock.

Section 1361(b)(2) provides that for purposes of § 1361(b)(1), the term “ineligible corporation” means any corporation which is (A) a financial institution which uses the reserve method of accounting for bad debts described in § 585, (B) an insurance company subject to tax under subchapter L, (C) a corporation to which an election under § 936 applies, or (D) a DISC or former DISC.

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated whenever the corporation ceases to be a small business corporation.

Section 1362(f) provides that if (1) an election under § 1362(a) by any corporation was terminated under § 1362(d), (2) the Secretary determines that the circumstances resulting in the termination were inadvertent, (3) no later than a reasonable period of time after the discovery of the circumstances resulting in the termination, steps were taken so that the corporation is a small business corporation, and (4) the corporation, and each person who was a shareholder of the corporation at any time during the period of inadvertent termination of the S election, agrees to makes such 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 circumstances resulting in the termination, the corporation is treated as an S corporation during the period specified by the Secretary.

Conclusion

Based solely on the facts submitted and representation made, we conclude that X’s election to be treated as an S corporation terminated in Year 2. We also conclude that the termination constituted an “inadvertent termination” within the meaning of § 1362(f).

Under the provisions of § 1362(f), X will be treated as continuing to be an S corporation from Year 2, and thereafter, provided that X’s S corporation election is not otherwise terminated under § 1362(d).

Except as expressly provided herein, no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the Code. In particular, no opinion is expressed as to whether X is an S corporation for federal tax purposes.
PLR-128840-05
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.

Pursuant to the power of attorney on file with this office, a copy of this letter will be sent to X’s authorized representative.

Sincerely,

David R. Haglund
Senior Technician Reviewer, Branch 1
Office of Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosures (2):
Copy of this letter,
Copy for § 6110 purposes

cc: