PLR 201113021: inadvertent S corporation termination disregarded

Plain-English summary

The IRS granted relief to a corporation whose S corporation election may have terminated during a specified period. The corporation and its shareholders were unaware of the possible termination, and the corporation took corrective action after discovering the error. The IRS concluded that the circumstances may have caused an inadvertent termination under IRC § 1362(f), and treated the corporation as an S corporation from the specified effective date onward. The relief required the corporation to remain otherwise eligible and the corporation and shareholders to make any required adjustments.

Ruling snapshot

• Question: Could the corporation be treated as an S corporation after a possible inadvertent termination of its election?
• Outcome: Approved.
• Key authorities: IRC §§ 1361(a), 1361(b)(1), 1362(a), 1362(d)(2)(A), and 1362(f).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201113021
Third Party Communication: None
Release Date: 4/1/2011
Date of Communication: Not Applicable
Index Number: 1361.01-00, 1361.01-04
Person To Contact:
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Telephone Number:
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------------------------------------------------ Refer Reply To:
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CC:PSI:B01
PLR-144515-10
Date:
December 10, 2010

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

D1 = ------------------

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

D3 = --------------------------

D4 = ----------------------

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

This responds to a letter dated October 25, 2010, submitted on behalf of X by its authorized representative, requesting relief under § 1362(f) of the Internal Revenue Code.

FACTS

The information submitted states that X was incorporated under the laws of State on D1 and made an election to be treated as an S corporation effective D2. The facts as represented indicate that X’s S corporation election may have terminated during the period from D3 to D4. X and its shareholders were unaware that its S corporation election may have terminated. After discovering the error, X has taken subsequent corrective action.

PLR-144515-10
2

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.

LAW AND ANALYSIS

Section 1361(a) 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 1361(b)(1) provides that the term “small business corporation” means a domestic corporation which is not an ineligible corporation and which 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 1 class of stock.

Section 1362(a) provides, in part, that a small business corporation may elect to be an S corporation.

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated whenever (at any time on or after the 1st day of the 1st taxable year for which the corporation is an S corporation) such corporation ceases to be a small business corporation. The termination is effective on and after the day of the termination.

Section 1362(f) provides, in part, that if (1) an election under § 1362(a) by any corporation was terminated under § 1362(d)(2); (2) the Secretary determines that the circumstances resulting in such termination were inadvertent; (3) no later than a reasonable period of time after discovery of the circumstances resulting in such termination, steps were taken so that the corporation for which the termination occurred is a small business corporation; and (4) the corporation for which the termination occurred, and each person who was a shareholder in such corporation at any time during the period specified pursuant to § 1362(f), agrees to make such adjustments (consistent with the treatment of such corporation as an S corporation) as may be required by the Secretary with respect to such period, then, notwithstanding the circumstances resulting in such termination, such corporation shall be treated as an S corporation during the period specified by the Secretary.

CONCLUSION

Based solely on the facts submitted and representations made, we conclude that the circumstances represented by the taxpayer may have caused an inadvertent termination of X’s S corporation election within the meaning of § 1362(f). Therefore, X will be treated as an S corporation effective D3 and thereafter, provided X’s S corporation election is not otherwise terminated under § 1362(d).

PLR-144515-10
3

Except as expressly provided herein, we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, we express or imply no opinion regarding X’s eligibility 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 a power of attorney on file, a copy of this letter is being sent to X's authorized representative.

Sincerely,

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

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