PLR 200602020: Late S corporation election accepted from business start date

Plain-English summary

Two shareholders intended their corporation to be an S corporation from the date it began business, but they did not file Form 2553 on time. The IRS found reasonable cause for the missed deadline and granted late-election relief under § 1362(b)(5). The election would be treated as timely from the start date if the company filed a completed Form 2553 within 60 days of the ruling, with the ruling attached. The IRS expressly did not decide whether the company otherwise qualified as a small business corporation under § 1361(b).

Ruling snapshot

• Question: Could a late S election take effect when the corporation began business?
• Outcome: Approved, conditional on filing Form 2553 within 60 days and otherwise qualifying.
• Key authorities: IRC §§ 1361(b), 1362(b)(5).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200602020
Third Party Communication: None
Release Date: 1/13/2006
Date of Communication: Not Applicable
Index Number: 1362.01-03
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B02
PLR-135873-05
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Date:
October 3, 2005

Legend

X: ---------------------------------------------
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A: -----------------------------
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B: --------------------
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Date 1: -----------------

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

This responds to a letter dated June 27, 2005, and subsequent correspondence, submitted on behalf of X, requesting a ruling under § 1362(b)(5) of the Internal Revenue Code.

The information submitted states that X began doing business on Date 1. A and B, the shareholders of X, intended for X to be an S corporation effective Date 1. However, a Form 2553, Election by a Small Business Corporation, was not timely filed. Accordingly, X requests a ruling that it will be treated as an S corporation effective Date 1.

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.
PLR-135873-05
2

Section 1362(b)(2) provides in relevant part 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 section 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 section 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 section 1362(b)(3) shall not apply.

Based solely on the facts and the representations submitted, we conclude that X has established reasonable cause for failing to make a timely election to be an S corporation effective Date 1. Accordingly, provided that X makes an election to be an S corporation by filing a completed Form 2553 with the appropriate service center effective Date 1 within 60 days following the date of this letter, then such election will be treated as timely made for Date 1. A copy of this letter should be attached to the Form 2553.

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 was or is a small business corporation under § 1361(b).

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.

Pursuant to a power of attorney on file with this office, a copy of this letter is being forwarded to X’s authorized representative.

Sincerely,

Audrey W. Ellis
Reviewer, Branch 2
Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures
Copy of this letter
Copy for § 6110 purposes

cc: