PLR 201051010: S corporation status preserved after possible termination

Plain-English summary

An S corporation’s shareholder engaged in an event that may have inadvertently terminated the corporation’s S election. The corporation represented that the event was not motivated by tax avoidance, that it took corrective steps after discovering the issue, and that it would make any required adjustments. The IRS treated the corporation as continuing to be an S corporation from the event date, subject to the existing election being valid and to the trustee filing an effective electing small business trust election within 120 days. The ruling would become void if the corporation or its shareholders failed to follow the required treatment.

Ruling snapshot

• Question: May the corporation continue to be treated as an S corporation after a shareholder event that may have terminated its election?
• Outcome: approved
• Key authorities: IRC §§ 1361(b), 1361(d), 1362(d), and 1362(f); Treas. Reg. § 1.1361-1(m)(2).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201051010
Third Party Communication: None
Release Date: 12/23/2010
Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
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Telephone Number:
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------------------------------------------ Refer Reply To:
CC:PSI:B02
PLR-116717-10
Date: August 30, 2010

LEGEND

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

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

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

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

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

This responds to a letter dated April 5, 2010, submitted on behalf of X, requesting a ruling under § 1362(f) of the Internal Revenue Code.

The information submitted states that X was incorporated in State on Date 1. X made an election to be treated as an S corporation effective Date 2. On or about Date 3, X’s shareholder A engaged in an event that may have inadvertently terminated X’s S corporation election.

X represents that the possible termination was not motivated by tax avoidance or retroactive tax planning. X represents that after it discovered the possible terminating event, X initiated corrective action. X and its shareholders have agreed to make any adjustments that the Commissioner may require, consistent with the treatment of X as an S corporation.
PLR-116717-10
2

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), (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 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, the corporation will be treated as an S corporation during the period specified by the Secretary.

Based solely on the facts submitted and the representations made, we conclude that the possible termination of X’s S corporation election because of an event engaged in by shareholder A on or about Date 3 was inadvertent within the meaning of § 1362(f). We further hold that, pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S corporation from Date 3 and thereafter, provided X’s S corporation election was valid and provided that the election was not otherwise terminated under § 1361(d). This ruling is contingent on the trustee of A filing an electing small business trust (ESBT) election pursuant to the procedures in § 1.1361-1(m)(2) with an effective date of Date 3 with the appropriate service center within 120 days of the date of this letter. A copy of this letter should be attached to the ESBT election. If X or its shareholders fail to treat themselves as described above, this letter ruling shall be null and void.

Except as specifically ruled above, we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the Code. Specifically, we express no opinion as to whether X is otherwise eligible to be treated as an S corporation.

This ruling is directed only to the taxpayer that requested it. Section 6110(j)(3) provides that it may not be used or cited as precedent.
PLR-116717-10
3

Pursuant to a power of attorney on file, a copy of this letter is being sent to X’s authorized representative.

Sincerely,

Bradford R. Poston
Senior Counsel, Branch 2
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

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