PLR 201134002: IRS treats an S corporation election as continuing after an inadvertent termination

Plain-English summary

A corporation's S corporation election terminated when an ineligible shareholder acquired its stock. The corporation represented that the termination was inadvertent, that the stock was returned to eligible shareholders within a reasonable period, and that the corporation and its shareholders would make any required tax adjustments. The IRS ruled that the termination was inadvertent and allowed the corporation to be treated as an S corporation from the termination date through the stock transfer date and afterward, provided the election had been valid and was not otherwise terminated.

Ruling snapshot

• Question: Can the corporation continue to be treated as an S corporation after an inadvertent termination caused by an ineligible shareholder?
• Outcome: Approved
• Key authorities: IRC §§ 1361, 1362, and 6110

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201134002
Third Party Communication: None
Release Date: 8/26/2011
Date of Communication: Not Applicable
Person To Contact:
Index Number: 1362.04-00
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Telephone Number:
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Refer Reply To:
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CC:PSI:B02
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PLR-104643-11
-------------------------------------------- Date:
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April 28, 2011

LEGEND

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

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

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

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

Date 4 = ----------------------

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

This responds to a letter dated January 14, 2011, and additional correspondence, 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. X’s election was inadvertently terminated effective Date 3 when Y, an ineligible shareholder, acquired X stock. On Date 4, Y entered into an agreement to return X stock to eligible S corporation shareholders. X represents that the termination was not motivated by tax avoidance or retroactive tax planning. 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-104643-11
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 termination of X’s S corporation election on 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 to Date 4, and thereafter, provided X’s S corporation election was valid and provided that the election was not otherwise terminated under § 1361(d).

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

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