PLR 200724030: Late S corporation election receives conditional relief

Plain-English summary

A corporation's shareholder intended for it to be an S corporation from its incorporation date, but the corporation did not file Form 2553 on time. The corporation and its shareholder represented that they had reported income consistently with S corporation status and that the late filing was not motivated by tax avoidance or retroactive planning. The IRS found reasonable cause under section 1362(b)(5) and ruled that the election would be treated as timely if the corporation filed a completed Form 2553 within 60 days of the letter. The IRS did not decide whether the corporation otherwise qualifies as an S corporation under section 1361.

Ruling snapshot

• Question: Can a corporation's late S corporation election take effect from its incorporation date?
• Outcome: Approved, conditioned on filing Form 2553 within 60 days of the ruling.
• Key authorities: IRC §§ 1362(b)(5), 1361

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200724030
Third Party Communication: None
Release Date: 6/15/2007
Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.01-00,
1362.01-03
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:PSI:B03
PLR-155001-06
Date:
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March 12, 2007

LEGEND

X = ------------------------------------------------------------------------------------------------------
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A = ------------------------------------------------------------------------------------------------------
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State = --------------

D1 = ----------------------

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

We received the letter dated November 21, 2006, and subsequent correspondence, submitted on behalf of X by X’s authorized representative, requesting a ruling under
§ 1362(b)(5) of the Internal Revenue Code. This letter responds to your request.

FACTS

X was incorporated under the laws of State on D1. A, X’s shareholder, represents that he intended for X to be an S corporation as of D1. However, Form 2553, Election by a Small Business Corporation, was not filed timely.

X represents that both X and its shareholder have reported their income consistent with X’s intended status as an S corporation. X further represents that its failure to timely file Form 2553 was not motivated by tax avoidance or retroactive tax planning. X requests a ruling that it will be recognized as an S corporation effective D1.

PLR-155001-06
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LAW AND ANALYSIS

Section 1362(a)(1) provides, in general, that except as provided in § 1362(g), a small business corporation may elect, in accordance with the provisions of § 1362, to be an S corporation.

Section 1362(b)(1) provides that, in general, 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)(3) provides that if (A) a small business corporation makes an election under § 1362(a) for any taxable year, and (B) such election is made after the 15th day of the third month of the taxable year and on or before the 15th day of the third month of the following taxable year, then such election shall be treated as made for the following taxable year.

Section 1362(b)(5) provides that if (A) an election under § 1362(a) is made for any taxable year (determined without regard to § 1362(b)(3)), after the date prescribed by
§1362(b) for making the election for the taxable year or no § 1362(a) 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, then the Secretary may treat the election as timely made for the taxable year (and § 1362(b)(3) shall not apply.)

CONCLUSION

Based solely on the facts submitted and representations made, we conclude that X has established reasonable cause for failing to make a timely S corporation election. Thus, we conclude that X is eligible for relief under § 1362(b)(5). Accordingly, if X makes an election to be an S corporation by filing with the appropriate service center a completed Form 2553 effective D1, within 60 days following the date of this letter, we rule that the election shall be treated as timely made. A copy of this letter should be attached to the Form 2553.

Except for the specific ruling above, no opinion is expressed or implied concerning the federal tax consequences of the facts of this case under any other provision of the Code. Specifically, no opinion is expressed or implied regarding as to whether X otherwise qualifies as a subchapter S corporation under § 1361.

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.

Under a power of attorney on file with this office, we are sending a copy of this letter to your authorized representative.

PLR-155001-06
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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, Branch 3
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures (2)
A copy of this letter
A copy for § 6110 purposes