PLR 201144009: IRS permits an early S corporation re-election after termination

Plain-English summary

A corporation whose S corporation election had terminated asked to re-elect S corporation status before the normal five-year waiting period ended. The IRS found that a majority shareholder who was not an owner when the earlier election terminated supported consent to an early re-election. It granted permission for the corporation to file Form 2553 within 120 days, with the election effective on the requested date, provided the corporation otherwise qualified as an S corporation. The ruling expressed no opinion on that underlying eligibility.

Ruling snapshot

• Question: May the corporation re-elect S corporation status before the five-year waiting period expires?
• Outcome: approved
• Key authorities: IRC §§ 1362(a), 1362(d)(2), and 1362(g); Treas. Reg. § 1.1362-5(a)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201144009
Third Party Communication: None
Release Date: 11/4/2011
Date of Communication: Not Applicable
Index Number: 1362.01-02
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B02
PLR-110777-11
Date:
July 27, 2011

Legend

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

D1 = ---------------------------------------------- D2 = ---------------------------------------------- D3 = ---------------------------------------------- D4 = ---------------------------------------------- D5 = ----------------------

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

This letter responds to a letter dated, March 14, 2011, and subsequent correspondence, submitted on behalf of X, requesting a ruling under § 1362(g) of the Internal Revenue Code.

FACTS

The information submitted states that X was incorporated under the laws of State on D1 and elected to be an S corporation, effective D2. On D3, X’s S election terminated. Effective D4, there is a majority shareholder, A, who was not a shareholder of X on D3. X requests permission to re-elect to be an S corporation, effective D5. D5 is prior to the
PLR-110777-11
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five-year waiting period imposed by § 1362(g).

LAW

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.

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 D5. Accordingly, provided that X makes an election to be an S corporation by filing a completed Form 2553 with the appropriate service center effective D5 within 120 days following the date of this letter, then such election will be treated as timely made for X’s taxable year beginning D5. A copy of this letter should be attached to the Form 2553.

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.
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This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

Pursuant to a power of attorney on file with this office, copies of this letter are being forwarded 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