PLR 200720002: Corporation receives relief for late S election

Plain-English summary

A corporation intended to be taxed as an S corporation from its incorporation date but did not file its election on time. The IRS found reasonable cause for the late filing under IRC § 1362(b)(5). It ruled that the corporation would be recognized as an S corporation from that date, provided it otherwise qualified. The corporation had 60 days from the ruling date to submit a completed Form 2553 with a copy of the letter.

Ruling snapshot

• Question: May the corporation's late S election take effect from incorporation?
• Outcome: Approved, subject to S corporation eligibility and timely submission of Form 2553.
• Key authorities: IRC § 1362(a), (b)(5).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200720002
Third Party Communication: None
Release Date: 5/18/2007
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:B1
PLR-103670-07
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Date: February 16, 2007

Legend:

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

State = --------------------

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

This responds to a letter dated November 3, 2006 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. The shareholders of X desired that X elect S corporation treatment effective on 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 1.

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.
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
PLR-103670-07
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§ 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 made.

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 file 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 1. Within 60 days from the date of this letter X should submit a properly completed Form 2553 effective Date 1, 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.

This ruling is directed only to the taxpayer(s) 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 mailed to your authorized representative.

Sincerely,

Dianna K. Miosi
Branch Chief, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes