PLR 201122001: IRS restored S corporation status after an inadvertent shareholder transfer

Plain-English summary

The IRS considered a corporation whose S election ended when its shares were transferred to an ineligible shareholder. The corporation and its shareholders took corrective action after discovering the termination and represented that it was inadvertent. The IRS ruled that the corporation would be treated as an S corporation from the transfer date onward under IRC § 1362(f), provided its S election was not otherwise terminated. The ruling did not decide the corporation's eligibility under any other provision.

Ruling snapshot

• Question: Could the corporation receive relief after an inadvertent S election termination caused by a transfer to an ineligible shareholder?
• Outcome: Approved.
• Key authorities: IRC §§ 1361, 1362, 6110.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201122001
Third Party Communication: None
Release Date: 6/3/2011
Date of Communication: Not Applicable
Person To Contact:
Index Number: 1362.04-00, 1362.02-03
--------------, ID No. -----------------
Telephone Number:
--------------------
----------------------------------------
Refer Reply To:
-----------------------------------
CC:PSI:B01
-----------------------------------
PLR-103103-11
-------------------------------
Date:
February 25, 2011

LEGEND

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

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

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

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

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

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

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

This responds to a letter dated December 30, 2010, submitted on behalf of X by X’s authorized representative, requesting relief under section 1362(f) of the Internal Revenue Code (the Code).

FACTS

According to the information submitted and representations made within, X was incorporated and made a valid S election on Date 1, under the laws of State.

On Date 2, A transferred his X shares to B, an ineligible shareholder, thus causing an inadvertent termination of X’s S corporate status. After the discovery of the terminating event, X and its shareholders took corrective action.
PLR-103103-11
2

X represents that its S corporation election termination was inadvertent and was not motivated by tax avoidance or retroactive tax planning. Further, X represents that X and its shareholders agree to make any adjustments required as a condition of obtaining relief under the inadvertent termination rule as provided under § 1362(f) of the Code that may be required by the Secretary.

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 the year. Section 1361(b)(1) defines a “small business corporation” as a domestic corporation which is not an ineligible corporation which does not (A) have more than 100 shareholders, (B) have as a shareholder a person (other than an estate, and a trust described in subsection (c)(2), or an organization described in subsection (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(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 taxable year for which the corporation is an S corporation) such corporation ceases to be a small business corporation.

Section 1362(f) provides in part that if (1) an election under § 1362(a) by any corporation was terminated under § 1362(d), (2) the Secretary determines that the circumstances resulting in the termination were inadvertent, (3) no later than a reasonable period of time after the discovery of the circumstances resulting in the 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 of inadvertent termination of the S election, agrees to makes 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 termination, the corporation is treated as an S corporation during the period specified by the Secretary.

CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that the termination of X’s S election was inadvertent within the meaning of § 1362(f). Therefore, X will be treated as an S corporation effective Date 2 and thereafter, provided X’s S corporation election is not otherwise terminated under § 1362(d).

Except as specifically ruled upon above, we express or imply no opinion concerning the
PLR-103103-11
3

federal tax consequences of the facts of this case under any other provision of the Code. Specifically, we express or imply no opinion regarding X’s eligibility to be an S corporation.

This ruling is directed only to the taxpayer who requested it. According to § 6110(k)(3), this ruling may not be used or cited as precedent.

Pursuant to the power of attorney on file with this office, we are sending a copy of this letter to your authorized representative.

Sincerely,

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

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

cc: