PLR 201051008: S corporation election cured after missing shareholder consents

Plain-English summary

A corporation attempted to elect S corporation status, but two shareholders did not provide the required consents. The IRS ruled that the election was ineffective because of the missing consents, but that the failure was an inadvertent ineffective election under IRC § 1362(f). The corporation could be treated as an S corporation from its requested effective date if its election was otherwise valid and the shareholders filed the required consents within 120 days. The ruling matters because it allowed the corporation to preserve its intended S corporation treatment after correcting the consent problem.

Ruling snapshot

• Question: Can the corporation be treated as an S corporation from the requested effective date after required shareholder consents were omitted?
• 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

Third Party Communication: None
Number: 201051008
Date of Communication: Not Applicable
Release Date: 12/23/2010
Person To Contact:
----------------------, ID No. -----------------
Index Number: 1362.01-01
Telephone Number:
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--------------------------------------------------- Refer Reply To:
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CC:PSI:B03
------------------------------------------------ PLR-113184-10 Date:
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September 16, 2010

Legend

X = --------------------------------------------
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A = --------------------------------------------
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B = --------------------------------------------
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State = ----------

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

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

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

This responds to a letter dated March 24, 2010, 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 on Date 1. X attempted to elect to be treated as an S corporation effective Date 2. However, the required consents to X’s S corporation election were not obtained from shareholders A and B. As a result, the election was ineffective. X seeks a ruling that X will be treated as an S corporation effective Date 2.

X and its shareholders 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 and B to consent to the election. We also conclude that the ineffective election constitutes an “inadvertent ineffective election” within the meaning of § 1362(f).
Therefore, X will be treated as an S corporation from Date 2, provided that X's S corporation election is otherwise valid and is not otherwise terminated under § 1362(d).

As a condition of this ruling, a consent to the S election signed by A and B must be filed with the appropriate service center, indicating that the consent is to be associated with the originally filed Form 2553, within 120 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. In particular, no opinion is expressed as to whether X is otherwise an S corporation for federal tax purposes.

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, a copy of this letter will be sent to X's authorized representatives.

Sincerely,

/s/

Tara P. Volungis
Acting Branch Chief, Branch 3
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosures (2):

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