PLR 201137002: IRS treats an inadvertent S corporation termination as continuing

Plain-English summary

A corporation's S corporation election terminated when all of its stock was acquired by an ineligible shareholder. The corporation represented that the termination was inadvertent, was not motivated by tax avoidance, and that the corporation and its shareholders continued filing returns consistently with S corporation status. The IRS concluded that the termination was inadvertent and treated the corporation as continuing to be an S corporation from the termination date, provided the election had originally been valid and was not otherwise terminated. The ruling was conditioned on transferring the stock to a trust and filing a QSST election within 120 days.

Ruling snapshot

• Question: Whether the corporation's S corporation election could be treated as continuing after an inadvertent termination caused by an ineligible shareholder.
• Outcome: Approved, subject to stated conditions.
• Key authorities: IRC §§ 1361(b), 1361(d), 1362(a), 1362(d), and 1362(f).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201137002
Third Party Communication: None
Release Date: 9/16/2011
Date of Communication: Not Applicable
Index Number: 1362.04-00, 1362.01-00
Person To Contact:
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Refer Reply To:
CC:PSI:B03
PLR-104758-11
Date:
June 01, 2011

X = --------------------------------------------------------------------------------------------------
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Trust = --------------------------------------------------------------------------------------------------
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D1 = ----------------------

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

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

This responds to a letter dated January 25, 2011, and subsequent correspondence submitted on behalf of X by its authorized representative, requesting a ruling under § 1362(f) of the Internal Revenue Code.

X made an election to be treated as an S corporation. X’s election was terminated effective D1 because all its stock was acquired by an ineligible shareholder.

X represents that the circumstances resulting in the termination of X’s S corporation election were inadvertent and not motivated by tax avoidance. X further represents that from D1, X and its shareholders have filed all returns consistent with X’s status as an S corporation. X and its shareholders have agreed to make such
PLR-104758-11
2

adjustments consistent with the treatment of X as an S corporation as may be required by the Secretary.

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 on D1 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 D1 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 conditioned upon the ineligible shareholder of X’s stock transferring it to Trust effective D2. In addition, within 120 days of the date of this letter, the beneficiary of Trust must file a QSST election effective D2. If X or its shareholders fail to treat themselves as described above, this ruling is 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. 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.
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Pursuant to a power of attorney on file, a copy of this letter is being sent to X’s authorized representative.

Sincerely,

Richard T. Probst
Senior Technician Reviewer, Branch 3
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

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