PLR 200851015: reasonable cause found, but the S corporation election still has to be filed within 60 days

Plain-English summary

A corporation's shareholders meant it to be an S corporation from the day it was formed. Everyone behaved as though it were one: the corporation and its shareholders reported their income consistently with S status year after year. The one thing nobody did was file the Form 2553 that makes the election real, and by the time anyone noticed, the deadline had long passed.

The deadline is short. An election is timely if made during the preceding taxable year or by the fifteenth day of the third month of the year it is meant to take effect. Miss that and section 1362(b)(3) normally pushes the election forward, so it takes effect for the following year instead of the one intended. For a company that has been filing as an S corporation for years, being told the election starts later than everyone assumed is exactly the wrong answer.

Section 1362(b)(5) is the escape. If the Secretary determines there was reasonable cause for the failure to file on time, the election may be treated as timely made and the push-forward rule is switched off. The Service found reasonable cause here and concluded the corporation was eligible for relief.

What makes this ruling worth reading closely is the shape of the relief. It is not a declaration that the election exists. It is a conditional promise about one that does not yet exist. The letter says that if the corporation files a completed Form 2553 with the appropriate service center, effective the intended date, within 60 days of the letter, then the election will be treated as timely made. A copy of the letter goes with the form. The corporation still has to do the thing it failed to do. The ruling only guarantees that doing it late will be forgiven, and only if done inside that window. Nothing happens automatically.

The reservation attached to that relief matters just as much. Reasonable cause excuses lateness. It says nothing about whether the corporation was ever allowed to be an S corporation in the first place, and the Service expressly declined to opine on whether the corporation otherwise qualifies under section 1361. Eligibility questions, such as the kind of shareholders it has or the classes of stock it issued, survive untouched. The ruling also rests entirely on the taxpayer's own representations, made under penalty of perjury, which this office did not verify and which remain open to examination.

Two small defects in the released text are reproduced rather than corrected. The reservation paragraph reads "no opinion is expressed or implied regarding as to whether X otherwise qualifies," carrying a doubled connector where one word or the other belongs. And the signature block is a conformed copy: the mark "/s/" stands above the signer's name in place of the handwritten signature, which is how the public release was issued.

Citations are reproduced exactly as released. No section number, volume, page or date appears beyond the authorities printed in the letter.

The text came out of the PDF digitally rather than through optical character recognition, so no corrections were needed. Redacted values appear as runs of dashes, which is how the IRS released them.

Ruling snapshot

• Question: Where shareholders intended S corporation status from the start and reported consistently with it, but Form 2553 was never timely filed, may the late election be treated as timely made under section 1362(b)(5)?
• Outcome: Approved. Reasonable cause for the failure was established, so the corporation is eligible for relief. The relief is conditional: if the corporation files a completed Form 2553 effective the intended date within 60 days of the letter, with a copy of the letter attached, the election will be treated as timely made. No opinion was expressed on whether the corporation otherwise qualifies as a subchapter S corporation under section 1361.
• Key authorities: IRC sections 1362(a) and (a)(1), 1362(b), (b)(1), (b)(3) and (b)(5), 1362(g), and 1361 (reproduced as released, not verified here).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 200851015 Third Party Communication: None
Release Date: 12/19/2008 Date of Communication: Not Applicable Person To Contact: Index Numbers: 1362.00-00, 1362.01-03 ----------------------, ID No. ------------ Telephone Number:
--------------------
-------------------------------------- Refer Reply To:
-------------------------------------- CC:PSI:B03
----------------------------- PLR-121001-08
------------------------- Date:
September 12, 2008

Legend:

X = ------------------------------------------------------------------------------------------------------
------------------------

Date = -------------------

State = --------

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

This letter responds to the letter dated April 28, 2008, and subsequent correspondence, submitted by X, requesting a ruling under § 1362(b)(5) of the Internal Revenue Code.

Facts

X was incorporated under the laws of State. X’s shareholders represent that they intended for X to be an S corporation effective Date. However, Form 2553, Election by a Small Business Corporation, was not timely filed.

X represents that both X and its shareholders have reported their income consistent with X’s intended status as an S corporation. X requests a ruling that it will be recognized as an S corporation effective Date.

Law and Analysis

Section 1362(a)(1) provides 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 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 Date, 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) provides that it may not be used or cited as precedent.

The ruling contained in this letter is 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 ruling request, it is subject to verification on examination.

Sincerely,

/s/

Leslie H. Finlow
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

cc: