PLR 201126025: Permission granted for an early S corporation re-election

Plain-English summary

The IRS allowed a corporation whose S corporation election had terminated to re-elect S corporation status before the usual five-year waiting period ended. A majority shareholder who had not owned stock when the prior election terminated became a shareholder, which supported granting consent. The corporation was required to file a completed Form 2553 with the appropriate service center within 120 days for the re-election to be treated as timely. The ruling did not decide whether the corporation was otherwise eligible to be an S corporation.

Ruling snapshot

• Question: Whether a corporation could re-elect S corporation status before the five-year waiting period after its prior election terminated.
• Outcome: Approved, subject to filing Form 2553 within 120 days.
• Key authorities: IRC § 1362(a), (d)(2)(A), and (g); Treas. Reg. § 1.1362-5(a).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201126025
Third Party Communication: None
Release Date: 7/1/2011
Date of Communication: Not Applicable
Person To Contact:
Index Numbers: 1362.00-00, 1362.01-00,
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Telephone Number:
1362.01-02
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Refer Reply To:
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CC:PSI:B03
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PLR-151912-10
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Date:
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March 11, 2011
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LEGEND

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

Date = ----------------------
1
Date = ----------------------
2
Date = -----------------------
3
Date = ----------------------
4

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

This letter responds to your letter, dated September 16, 2010, submitted on behalf of X, requesting election after termination relief under § 1362(g) of the Internal Revenue Code.

FACTS

PLR-151912-10
2

The information submitted states that X was incorporated under the laws of State on Date 1 and elected to be an S corporation, effective Date 1. On Date 2, X’s S election terminated. Effective Date 3, there is a majority shareholder, A, who was not a shareholder of X on Date 2. X requests permission to re-elect to be an S corporation, effective Date 4. Date 4 is prior to the five-year waiting period imposed by § 1362(g).

LAW AND ANALYSIS

Section 1362(a) provides that except as provided in § 1362(g), 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.

Section 1362(g) provides that if a small business corporation has made an election under § 1362(a) and if such election has been terminated under § 1362(d), the corporation (and any successor corporation) shall not be eligible to make an election under § 1362(a) for any taxable year before its fifth taxable year which begins after the first taxable year for which the termination is effective, unless the Secretary consents to the election.

Section 1.1362-5(a) of the Income Tax Regulations provides that absent the Commissioner’s consent, an S corporation whose election has terminated (or a successor corporation) may not make a new election for five taxable years as described in § 1362(g). The Commissioner, however, may permit the corporation to make a new election before the 5-year period expires. The corporation has the burden of establishing that under the relevant facts and circumstances, the Commissioner should consent to a new election. The fact that more than 50 percent of the stock in the corporation is owned by persons who did not own any stock in the corporation on the date of the termination tends to establish that consent should be granted.

CONCLUSION

Based solely on the facts submitted and representations made, we conclude that X has met its burden under § 1.1362-5(a). We grant permission for X to re-elect to be an S corporation effective Date 4. Accordingly, provided that X makes an election to be an S corporation by filing a completed Form 2553 with the appropriate service center effective Date 4 within 120 days following the date of this letter, then such election will be treated as timely made for X's taxable year beginning Date 4. A copy of this letter should be attached to the Form 2553.

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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 regarding whether X is otherwise eligible 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.

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

The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the ruling request, it is subject to verification on examination.

Sincerely,

James A. Quinn
Senior Counsel, Branch 3
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures (2):

Copy of this letter
Copy for § 6110 purposes

cc: