PLR 1227003: IRS preserves S corporation status after an inadvertent termination

Plain-English summary

An S corporation's election terminated after stock was transferred to two trusts and the required electing small business trust elections were not properly filed. The corporation represented that the termination was inadvertent and was not motivated by tax avoidance or retroactive tax planning. The IRS allowed the corporation to be treated as continuing to be an S corporation during the specified period, provided the corporation and shareholders made the required tax adjustments and the trustees filed the ESBT elections within 120 days. The ruling became void if the corporation or shareholders failed to follow those conditions.

Ruling snapshot

• Question: Could the IRS treat a corporation as continuing to be an S corporation after an inadvertent termination caused by missing ESBT elections?
• Outcome: Approved
• Key authorities: IRC §§ 1361(e), 1362(f), 1366, 1367, 1368

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201227003 Third Party Communication: None
Release Date: 7/6/2012 Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.01-00,
1362.01-03, 1362.04-00 Person To Contact:
---------------------, ID No. -----------------
------------------------------- Telephone Number:
--------------------------------------- -------------------
------------------------------------- Refer Reply To:
---------------------------------------- CC:PSI:B03
PLR-142764-11
Date:
March 02, 2012

Legend

Company = -------------------------------
------------------------

State = --------------

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

b = ----------------------

c = -----------------------

Trust 1 = ---------------------------------------------------

Trust 2 = ---------------------------------------------------

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

This responds to a letter dated September 23, 2011, and subsequent correspondence,
submitted on behalf of Company requesting a ruling under § 1362(f) of the Internal
Revenue Code.

The information submitted states that Company was incorporated on a, under the laws
of State and elected to be an S corporation effective a. On b, one of Company’s
shareholders transferred Company stock to Trust 1 and Trust 2. Company represents that
Trust 1 and Trust 2 each qualifies as an electing small business trust (“ESBT”)
within the meaning of § 1361(e). However, no ESBT election was properly filed for
Trust 1 or Trust 2. As a result, Company’s S corporation election terminated on b.
Thereafter, on c, Company stock was transferred in a transaction that Company and its
shareholders were aware would terminate Company’s S election.

Company represents that the circumstances resulting in the termination of the
Company’s S corporation election on b were inadvertent and were not motivated by tax
avoidance or retroactive tax planning. Company and its shareholders during the period
beginning on b and ending on c have agreed to make such adjustments, consistent with
the treatment of Company as an S corporation, as the secretary may require.

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 on the information submitted and the representations made, we conclude that
the termination of Company's S corporation election on b was inadvertent within the
meaning of § 1362(f). Pursuant to the provisions of § 1362(f), Company will be treated
as continuing to be an S corporation during the period beginning on b and ending on c,
provided Company's S corporation election was valid and provided that the election was
not otherwise terminated under § 1362(d).

This ruling is contingent on Company and all of Company’s shareholders during the
period beginning on b and ending on c treating Company as having been an S
corporation during that period. The shareholders of Company, in determining their
income tax liabilities for the period beginning on b and ending on c, must include their
pro rata share of the separately stated and nonseparately computed items of income,
loss, deduction, or credit as provided in § 1366, make any adjustments to basis as
provided in § 1367, and take into account any distributions made by Company as
provided in § 1368. This ruling is also contingent on the trustees of Trust 1 and Trust 2
filing ESBT elections effective b, with the appropriate service center. The ESBT
elections and any amended returns must be filed within 120 days following the date of
this letter, and a copy of this letter should be attached to such elections and returns. If
Company or its shareholders fail to treat themselves as described above, this ruling
shall be null and void.

Except for the specific rulings above, we express or imply no opinion concerning the tax
consequences of any aspect of any transaction or item discussed or referenced in this
letter. Specifically, we express or imply no opinion regarding Company‘s eligibility to be
treated as an S corporation or the qualifications of Trust 1 or Trust 2 as an ESBT.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
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 Company's authorized representative.

                                   Sincerely,

                                   Stacy L. Short
                                   Senior Technician Reviewer, Branch 3
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosures (2)

   Copy of this letter
   Copy for § 6110 purposes