PLR 200847013: Partnership transfers caused inadvertent S election termination

Plain-English summary

An S corporation's election terminated when its stock was transferred to a partnership, which was not an eligible S corporation shareholder. A later transfer to a second partnership would have caused another termination if the first had not already occurred. The first partnership eventually distributed its shares to individual partners, and the second transferred its shares to a trust represented as eligible to elect small business trust status. The corporation said the transfers were not motivated by tax avoidance or retroactive tax planning, and it and its shareholders agreed to make any required adjustments. The IRS treated the first termination, and the potential second termination, as inadvertent under IRC § 1362(f), allowing S corporation status to continue if the original election was valid and no other termination occurred.

Ruling snapshot

• Question: Were the S corporation election terminations caused by transfers to two ineligible partnership shareholders inadvertent under IRC § 1362(f)?
• Outcome: Approved. The corporation remained an S corporation from the first transfer onward, subject to the stated conditions.
• Key authorities: IRC §§ 1361 and 1362(f)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200847013
Third Party Communication: None
Release Date: 11/21/2008
Date of Communication: Not Applicable
Person To Contact:
Index Number: 1362.04-00
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Telephone Number:
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Refer Reply To:
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CC:PSI:02
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PLR-126924-08
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Date:
August 01, 2008

LEGEND:

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

This responds to a letter dated June 11, 2008, submitted on behalf of X by its authorized representative, requesting a ruling under § 1362(f) of the Internal Revenue Code (the Code).

PLR-126924-08
2

X made an election to be treated as an S corporation. X’s election was inadvertently terminated effective D1 because X’s stock was transferred to Partnership 1, an ineligible S corporation shareholder, on that date. X’s election would have inadvertently terminated effective D2 had it not already terminated, because X’s stock was transferred to Partnership 2 on that date. On D3, Partnership 1 distributed its X stock to its individual partners. On D4, Partnership 2 transferred its X stock to Trust, which the taxpayer has represented as being eligible to make an electing small business trust election. X represents that the termination was not motivated by tax avoidance or retroactive tax planning. X and its shareholders have agreed to make any adjustments that the Commissioner may require, consistent with the treatment of X as an S corporation.

Section 1362(f) provides that if (1) an election under § 1362(a) by any corporation (A) was not effective for the taxable year for which made (determined without regard to § 1362(b)(2)) by reason of a failure to meet the requirements of § 1361(b) or to obtain shareholder consents or (B) was terminated under § 1362(d)(2) or (3), (2) the Secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent, (3) no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination, steps were taken (A) so that the corporation is a small business corporation or (B) to acquire the shareholder consents, and (4) the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to § 1362(f), agrees to make such adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to such period, then, notwithstanding the circumstances resulting in the ineffectiveness or termination, the corporation will be treated as an S corporation during the period specified by the Secretary.

Based solely on the facts submitted and the representations made, we conclude that the termination of X’s S corporation election on D1 was inadvertent within the meaning of § 1362(f). We further conclude that X’s S election would have inadvertently terminated within the meaning of § 1362(f) on D2. Pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S corporation from D1 and thereafter, provided X’s S corporation election was valid and provided that the election was not otherwise terminated under § 1362(d).

PLR-126924-08
3

Except as specifically ruled above, we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the Code. This ruling is directed only to the taxpayer that requested it. Section 6110(j)(3) provides that it may not be used or cited as precedent. Pursuant to a power of attorney on file, a copy of this letter is being sent to X’s authorized representative.

Sincerely,

Bradford R. Poston
Senior Counsel, Branch 2
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures: 2
Copy of this letter
Copy for § 6110 purposes

cc: