PLR 200851022: reasonable cause found for a late S corporation election, but no opinion on whether the company actually qualifies

Plain-English summary

A company was incorporated and everyone involved intended it to be an S corporation from its first day. The paperwork that makes that happen, Form 2553, was never filed on time. That is the whole of the problem this two-page letter addresses.

Timing is what makes a missed S election expensive. An election filed within the first two and a half months of a tax year takes effect for that year. File it later and section 1362(b)(3) pushes the election into the following tax year, which can leave the company taxed as a C corporation for a year nobody planned for. Section 1362(b)(5) is the escape hatch. If the Service determines there was reasonable cause for the delay, it may treat the election as timely and switch off the section 1362(b)(3) delay.

The Service found reasonable cause here. The relief is conditional and time limited. The company has 60 days from the date of the letter to file a completed Form 2553 electing S status as of its first day, with a copy of the ruling attached. Do that, and the election counts as timely for the tax year beginning on that date.

One reservation deserves attention, because it is easy to read this letter as more than it is. The Service expressly declined to say whether the company is in fact an S corporation for federal tax purposes. Section 1362(b)(5) relief cures lateness only. It does not decide whether the company was ever eligible, meaning whether it met the small business corporation requirements on shareholder count, shareholder type and single class of stock. Those questions remain open and can still be raised on examination.

Ruling snapshot

• Question: Was there reasonable cause for a corporation's failure to file a timely Form 2553, so that its S election can be treated as made on time as of its first day rather than delayed a year by section 1362(b)(3)?
• Outcome: Approved. Reasonable cause was established. Provided the company files a completed Form 2553 within 60 days of the letter, effective as of its date of incorporation, the election is treated as timely for the tax year beginning on that date. No opinion was expressed on whether the company is in fact an S corporation.
• Key authorities: IRC sections 1362(a), 1362(b), 1362(b)(3) and 1362(b)(5).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 200851022 Third Party Communication: None
Release Date: 12/19/2008 Date of Communication: Not Applicable Person To Contact: Index Number: 1362.01-03 --------------------, ID No. ------------ Telephone Number:
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------------------------------ Refer Reply To:
--------------------------------------- CC:PSI:02
----------------------------- PLR-132111-08
----------------------------------- Date:
September 15, 2008

LEGEND:

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Dear ---------:

This responds to a letter dated May 5, 2008, submitted on behalf of X requesting a ruling under § 1362(b)(5) of the Internal Revenue Code (the “Code”).

The information submitted states that X was incorporated in State on Date 1. It was intended that X elect S corporation treatment effective Date 1; however, a Form 2553, Election by a Small Business Corporation, was not timely filed for X.

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. Generally, 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. Section 1362(b)(3) provides that if an S election is made after the first two and one-half months of a corporation's taxable year, then the 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) an election under § 1362(a) is made for any taxable year 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 (2) 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 such taxable year and § 1362(b)(3) shall not apply.

Based solely on the facts and the representations submitted, we conclude that X has established reasonable cause for failing to make a timely election to be an S corporation effective Date 1. Accordingly, provided that X makes an election to be an S corporation by filing a completed Form 2553 with the appropriate service center effective Date 1 within 60 days following the date of this letter, then such election will be treated as timely made for X's taxable year beginning Date 1. A copy of this letter should be attached to the Form 2553.

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 requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

Sincerely,

Michael A. Skeen
Chief, Branch 2
Associate Chief Counsel
(Passthroughs and Special Industries)

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

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