PLR 200606032: Sole shareholder granted relief for late S election

Plain-English summary

The sole shareholder of a newly incorporated company intended it to be an S corporation from its incorporation date, but the company did not file Form 2553 on time. The IRS concluded that the company had reasonable cause for the late election. It would treat the election as timely from the incorporation date if the company filed a completed Form 2553 and a copy of the ruling within 60 days of the letter. The IRS did not rule on whether the company otherwise qualified as a small business corporation under section 1361(b).

Ruling snapshot

• Question: Could the company's late S corporation election take effect from its incorporation date?
• Outcome: Approved, conditioned on filing Form 2553 within 60 days.
• Key authorities: IRC § 1362(b)(5).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200606032
Release Date: 2/10/2006
Index Number: 1362.01-03

• Person To Contact:
  ---------------------- ---------------------- -------- -------------
  ------------------------------- Telephone Number:
  -------------------------- ---------------------
  ------------------------------------ Refer Reply To:
  CC:PSI:2 – PLR-148628-05
  Date:
  October 24, 2005

Legend

X = -------------------------------
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A = ----------------------
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D1 = ---------------------------

Dear ---------------
This letter responds a letter dated September 20, 2005, and subsequent correspondence, submitted on behalf of X, requesting relief under § 1362(b)(5) of the Internal Revenue Code.

The information submitted states that X was incorporated on D1. A, X’s sole shareholder, intended for X to be an S corporation effective D1. However, no Form 2553, Election by a Small Business Corporation, was timely filed for X.

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.

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 -- (A) an election under § 1362(a) is made for any taxable year after the date prescribed by § 1362(b) for making such election for

PLR-148628-05
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such taxable year or no such election is made for any taxable year, and (B) the Secretary determines that there was reasonable cause for the failure to timely make such election, the Secretary may treat such an election as timely made for such taxable year.

Based solely on the facts and representations submitted, we conclude that X has established reasonable cause for failing to make a timely election to be an S corporation effective D1. Accordingly, provided that X makes an election to be an S corporation by filing a completed Form 2553 effective D1, along with a copy of this letter, with the appropriate service center within 60 days from the date of this letter, then such election will be treated as timely made for D1.

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, including whether X was or is a small business corporation under § 1361(b).

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code 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 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 purposes