PLR 201152011: IRS grants relief for an inadvertent S corporation termination

Plain-English summary

The IRS ruled that a corporation's S corporation election terminated inadvertently when an ineligible shareholder acquired a portion of its stock. The corporation had later revoked its election and represented that the termination was not motivated by tax avoidance, that prior returns were filed consistently with S corporation status, and that the corporation and its shareholders would make required adjustments. Under IRC § 1362(f), the IRS allowed the corporation to be treated as continuing to be an S corporation during the specified period, subject to the election having been valid and not otherwise terminated. The ruling is limited to the requested relief and does not address other federal tax consequences.

Ruling snapshot

• Question: May the corporation be treated as continuing to be an S corporation after an inadvertent termination of its election?
• Outcome: Approved.
• Key authorities: IRC §§ 1361, 1362, 6110

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201152011
Third Party Communication: None
Release Date: 12/30/2011
Date of Communication: Not Applicable
Person To Contact:
Index Number: 1362.04-00, 1362.01-00
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Telephone Number:
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Refer Reply To:
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CC:PSI:B03
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PLR-132729-11
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Date:
September 08, 2011

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

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

a = ---------------

Dear -----------------

This responds to a letter dated August 2, 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 revoked its election effective D2. X subsequently discovered that its X’s election had previously terminated effective D1 when an ineligible shareholder acquired a% of X’s stock.

X represents that the circumstances resulting in the termination of X’s S corporation election from D1 to D2 were inadvertent and not motivated by tax avoidance. X further represents that X and its shareholders filed all returns consistent with X’s status as an S corporation prior to D2. X and its shareholders have agreed to make such 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
PLR-132729-11
2

§ 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 to D2, provided X’s S corporation election was valid and provided that the election was not otherwise terminated under § 1362(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(k)(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 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

cc: