PLR 200722001: Late S election survives state administrative dissolution

Plain-English summary

A corporation and its sole shareholder intended S corporation treatment from incorporation, but Form 2553 was not filed on time. The state later administratively dissolved the company for a missed annual report, and the shareholder reincorporated it after discovering the problem. The IRS found reasonable cause for the late S election and ruled that the intervening state dissolution did not end the company's corporate existence for federal income tax purposes. The election would be treated as timely if the company filed a completed Form 2553 with the ruling within 60 days. The IRS did not decide whether the company otherwise qualified as a small business corporation.

Ruling snapshot

• Question: Can the late S election take effect from incorporation despite the later state dissolution?
• Outcome: Yes, if the company files Form 2553 with the ruling within 60 days.
• Key authorities: IRC §§ 1361(b), 1362(a), 1362(b)(5); Treas. Reg. § 301.7701-1.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200722001
Third Party Communication: None
Release Date: 6/1/2007
Date of Communication: Not Applicable
Index Number: 1362.01-03, 1362.00-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B03
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PLR-100840-07
Date: February 16, 2007

LEGEND

Company = ---------------------------
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Shareholder = ----------------------------------
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State = --------

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

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

Date 3 = ---------------------

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

This letter responds to your letter dated December 26, 2006, requesting a ruling under
§ 1362(b)(5) of the Internal Revenue Code.

FACTS

Company incorporated under State law on Date 1. Shareholder, Company’s sole shareholder, intended for Company to be an S corporation effective Date 1. However, through no fault of Company or Shareholder, Form 2553, Election by a Small Business Corporation, was not timely filed for Company. On Date 2, State administratively dissolved Company because Company’s agent failed to file an annual report. Upon discovery of the administrative dissolution, Shareholder reincorporated Company in

PLR-100840-07
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State on Date 3. For all relevant tax years, Company and Shareholder filed federal tax returns consistent with Company’s intended status as an S corporation.

LAW AND ANALYSIS

Section 1362(a) provides, in general, that a small business corporation may elect to be an S corporation.

Section 1362(b)(1) provides that an election under § 1362(a) may be made by a small business corporation for any taxable year (A) at any time during the preceding taxable year, or (B) at any time during the taxable year and on or before the 15th day of the third month of the taxable year.

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 the election for that 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 the election, the Secretary may treat such an election as timely made for that taxable year.

The core test of corporate existence for purposes of federal income taxation is always a matter of federal law. Whether an organization is to be taxed as a corporation under the Code is determined by federal, not state law. See § 301.7701-1 of the Procedure and Administration Regulations. If the conduct of the affairs of a corporation continues after the expiration of its charter, or the termination of its existence, it becomes an association. Ochs v. United States, 305 F.2d 844, 847 (Ct. Cl. 1962), cert. denied, 373 U.S. 923 (1963). A corporation is subject to federal corporate income tax liability as long as it continues to do business in a corporate manner, despite the fact that its recognized legal status under state law is terminated. Messer v. Commissioner, 438 F.2d 774 (3d Cir. 1971).

CONCLUSION

Based solely on the facts and representations submitted, we conclude that Company has established reasonable cause for failing to make a timely election to be an S corporation effective Date 1. Accordingly, provided that Company makes an election to be an S corporation by filing a completed Form 2553 effective Date 1, 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 Date 1. Company’s administrative dissolution and subsequent reincorporation did not cause Company to cease to be a corporation for federal income tax purposes and does not affect this ruling.

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

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 your authorized representative.

The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

Sincerely,

/s/

Tara P. Volungis
Senior Technician Reviewer
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

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