PLR 201017030: S corporation status preserved after a shareholder consent was missed

Plain-English summary

The IRS treated a corporation as an S corporation during a specified period even though a clerical error in its share register meant that one shareholder's required consent to the S election was not obtained. The IRS found that the resulting ineffective election was inadvertent and allowed the treatment from the requested effective date until the date the corporation ceased to be a small business corporation. The ruling required the missing shareholder consent to be filed with the appropriate service center within 60 days, with the ruling attached.

Ruling snapshot

• Question: Can S corporation treatment apply after a required shareholder consent was missed?
• Outcome: approved
• Key authorities: IRC §§ 1361(a)(1), 1362(a)(2), and 1362(f)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201017030
Third Party Communication: None
Release Date: 4/30/2010
Date of Communication: Not Applicable
Index Number: 1362.01-01
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B01
PLR-141739-09
Date:
January 21, 2010

LEGEND

X = ---------------------------------------------------------------------------------------------------------------
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a = --------------------------
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D1 = ----------------------

D2 = -----------------------

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

This responds to a letter dated August 21, 2009, and subsequent correspondence, submitted on behalf of X, requesting a ruling under § 1362(f) of the Internal Revenue Code.

Facts

According to the information submitted, X was incorporated under the laws of State. X attempted to elect to be treated as an S corporation effective D1. However, due to a clerical error on the share register of X, the required consent to X’s S corporation election was not sought or obtained from shareholder a. As a result, the
PLR-141739-09
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election was ineffective. X seeks a ruling that X will be treated as an S corporation from D1 to D2, the date on which X ceased to be a small business corporation.

X and its shareholders from D1 to D2 agree to make any adjustments required by the Secretary consistent with the treatment of X as an S corporation.

Law and Analysis

Section 1361(a)(1) provides that the term “S corporation” means, with respect to any taxable year, a small business corporation for which an election under § 1362(a) is in effect for such year.

Section 1362(a)(2) provides that such an election shall be valid only if all persons who are shareholders in such corporation on the day on which such election is made consent to such election.

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 it was 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 such ineffectiveness or termination were inadvertent, (3) no later than a reasonable period of time after discovery of the event resulting in the ineffectiveness or termination, steps were taken (A) so that the corporation is a small business corporation, or (B) to acquire the required 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 such ineffectiveness or termination, the corporation shall be treated as an S corporation during the period specified by the Secretary.

Conclusion

Based solely on the information submitted and the representations made, we conclude that X's election to be treated as an S corporation was ineffective due to the failure of a to consent to the election. We also conclude that the ineffective election constituted an “inadvertent ineffective election” within the meaning of § 1362(f). Therefore, X will be treated as an S corporation from D1 until D2, provided that X's S corporation election was otherwise valid and was not otherwise terminated under § 1362(d).

As a condition of this ruling, a consent to the S election signed by a must be filed with the appropriate service center, indicating that the consent is to be associated with
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the originally filed Form 2553, within 60 days of this letter.

A copy of this letter should be attached to the consent. This letter ruling will be null and void if these conditions are not satisfied.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, no opinion is expressed concerning whether X was otherwise eligible to be an S corporation.

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.

Pursuant to the power of attorney on file with this office, copies of this letter will be sent to X's authorized representatives.

Sincerely,

David R. Haglund
David R. Haglund
Chief, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures (2)

Copy of this letter
Copy of this letter for § 6110 purposes