PLR 1030021: Inadvertent S corporation election failure excused

Plain-English summary

The IRS granted relief to a corporation whose S corporation election was not signed by every shareholder. The omitted signature belonged to an estate administrator, because the shareholders believed that the estate's shares had already been transferred to another shareholder. The IRS found that the election failure was inadvertent and allowed the corporation to be treated as continuing to be an S corporation from the intended effective date, provided the election was not otherwise invalid or terminated. The corporation and its shareholders had represented that the mistake was not motivated by tax avoidance and agreed to make any required adjustments.

Ruling snapshot

• Question: Could the corporation retain S corporation status after an election was not signed by all shareholders?
• Outcome: Approved
• Key authorities: IRC §§ 1361(a), 1361(b), 1362(a), 1362(f), and 1362(d)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201030021 Third Party Communication: None
Release Date: 7/30/2010 Date of Communication: Not Applicable
Person To Contact:
Index Number: 1362.04-00 -----------------, ID No. -------------
Telephone Number:
--------------------
------------------------ Refer Reply To:
------------------------------- CC:PSI:B01
---------------- PLR-151779-09
---------------------------------- Date:
April 16, 2010

LEGEND

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

Date 1 = -------------------

Date 2 = --------------------------

Date 3 = ----------------------

Date 4 = -----------------------

Date 5 = -----------------

Date 6 = --------------------------

State = ------------------

A = ------------------------

B = ---------------------

Estate = -----------------------------

$y = -------

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

This letter responds to a letter dated --------------------------, submitted on behalf of X,
requesting relief under § 1362(f) of the Internal Revenue Code.
PLR-151779-09 2

FACTS

According to the information submitted, we understand the relevant facts to be as
follows:

X was incorporated on Date 1 in accordance with the laws of State and filed an election
to be treated as an S corporation effective Date 3. On Date 2, the shareholders of X
engaged in several transactions that were intended to result in A and B owning all of the
outstanding shares of X. Specifically, two other shareholders of X transferred all of their
X shares to A and B by agreements dated Date 2. After those transfers, the only
remaining shareholders of X were A, B, and Estate. A stock assignment dated Date 2
provided for the transfer of Estate’s shares in X to A in exchange for $y. However, the
agreement was not executed by the administrator of Estate. An unsigned check in the
amount of $y, drawn on the account of A and B, was prepared to the order of Estate
and attached to the stock assignment. The attorney who prepared the stock
assignment sent the document to A for delivery and execution by Estate’s administrator
along with payment. However, the attorney directed A not to execute the assignment or
make payment pending further instruction. The administrator of Estate was appointed
on Date 5.

On Date 4, A and B signed X’s Form 2553, Election by Small Business Corporation,
based on their belief that they were the only two shareholders of X. The administrator
of Estate did not sign the Form 2553.

On Date 6, the check for $y was delivered by A to the administrator of Estate and the
administrator of Estate executed the assignment of the stock from Estate to A.

X represents that at all times on and after Date 3, A, B, and the administrator of Estate
treated the shares of X owned by Estate as owned by A because they believed that the
transfer from Estate to A had been completed as of Date 2. X represents that the
events that resulted in the invalid S election were not motivated by tax avoidance or
retroactive tax planning, and that X and its shareholders have at all relevant times
treated X as an S corporation. X and its shareholders have consented to make any
adjustments that the Secretary may require, consistent with the treatment of X as an S
corporation effective Date 3.

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.
PLR-151779-09 3

Section 1361(b)(1) defines a “small business corporation” as a domestic corporation
that is not an ineligible corporation and that does not (A) have more than 100
shareholders; (B) have as a shareholder a person (other than an estate, a trust
described in § 1361(c)(2), or an organization described in § 1361(c)(6)) who is not an
individual; (C) have a nonresident alien as a shareholder, and (D) have more than one
class of stock.

Section 1362(a)(2) provides that an election under § 1362(a) is valid only if all persons
who are shareholders in the corporation on the day on which the election is made
consent to the 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 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) or
§ 1361(b)(3)(C), (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 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 the
ineffectiveness or termination, such corporation shall be treated as an S corporation
during the period specified by the Secretary.

CONCLUSION

Based on the information submitted and the representations made, we conclude that
X’s subchapter S election was ineffective because it was not signed by all of X’s
shareholders. In addition, we conclude that the ineffectiveness was inadvertent within
the meaning of § 1362(f). Therefore, X will be treated as continuing to be an S
corporation from Date 3, and thereafter, provided that X’s S election was not otherwise
invalid or terminated under § 1362(d).

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 is otherwise
eligible to be treated as 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.
PLR-151779-09 4

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                   Sincerely,

                                       /s/

                                   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

cc: