PLR 201237001: Administrative dissolution does not terminate an S corporation election

Plain-English summary

The IRS ruled that a corporation's administrative dissolution under state law did not terminate its S election, provided it had qualified as a small business corporation before the dissolution. The corporation had been dissolved by the state for failing to file a required report, remained unaware of the dissolution for several years, and later reincorporated. The IRS concluded that the corporation did not need to make a new S election, and that the dissolution and reincorporation did not by themselves cause a property distribution or transfer. On that same condition, the event did not affect the shareholders' stock basis or holding periods and did not require a new employer identification number. The IRS gave no opinion on whether the corporation was otherwise eligible for S corporation status.

Ruling snapshot

• Question: Did the corporation's administrative dissolution and later reincorporation affect its S corporation election, property transfers, shareholder stock basis, holding periods, or employer identification number?
• Outcome: Approved, provided the corporation qualified before dissolution. The IRS did not decide its eligibility on other grounds.
• Key authorities: IRC §§ 1361, 1362, 301, 311, 331, 336, and 351; Ochs v. United States, 305 F.2d 844 (Ct. Cl. 1962); Messer v. Commissioner, 438 F.2d 774 (3d Cir. 1971)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201237001
Third Party Communication: None
Release Date: 9/14/2012
Date of Communication: Not Applicable
Index Number: 1362.02-00
Person To Contact:
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Refer Reply To:
CC:PSI:03
PLR-101191-12
Date:
May 01, 2012

LEGEND

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

Date = ---------------------
1
Date = ------------------
2
Year = -------
1
Year = -------
2
Year = -------
3

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

This responds to a letter dated December 30, 2011, together with subsequent correspondence, requesting a ruling under the Internal Revenue Code.

FACTS

X incorporated under State law on Date 1. X elected to treated as an S corporation effective for Year 1. In Year 2, State administratively dissolved X because X failed to file a report required by State. From Year 2 to Year 3, X was unaware of the dissolution and continued to file Form 1120S, U.S. Income Tax Return for an S Corporation. Upon discovery of the dissolution, X reincorporated in State on Date 2.

PLR-101191-12
2

Now X is requesting a ruling whether:

1) X’s status as an S corporation is terminated by reason of its administrative
dissolution under the laws of State;

2) X, subsequent to its reincorporation, is required to make a new election under
§ 1362(a) of the Code;

3) X’s administrative dissolution and subsequent reincorporation resulted in a
distribution or contribution of property for the purposes of §§ 301(a), 311(a)(2),
336(a), or 351;

4) X’s administrative dissolution and subsequent reincorporation affects its
shareholders’ basis and holding periods in X stock; and

5) X may use the employer identification number assigned to it prior to its
administrative dissolution and is, therefore, not required to apply for the
assignment of a new employer identification number following its reincorporation.

                              LAW AND ANALYSIS

    Section 1361(a)(1) defines the term “S corporation,” with respect to any taxable

year, as a small business corporation for which an election under section 1362(a) is in effect for such year.

 Section 1361(b)(1) provides, in part, that a “small business corporation” must be a

domestic corporation.

    The core test of corporate existence for purposes of federal income taxation is

always a matter of federal law. Whether an organization is to be taxed as a corporation under the Code is determined by federal, not state law. If the conduct of the affairs of a corporation continues after the expiration of its charter, or the termination of its existence, it becomes an association. See Ochs v. United States, 305 F.2d 844, 847 (Ct. Cl. 1962), cert. denied, 373 U.S. 923 (1963). A corporation is subject to federal corporate income tax liability as long as it continues to do business in a corporate manner, despite the fact that its recognized legal status under state law is terminated. See Messer v. Commissioner, 438 F.2d 774 (3rd Cir. 1971).

                                  CONCLUSION

   Based solely on the facts submitted and the representations made, we conclude

that provided that X qualified as a small business corporation under § 1361(b) prior to the administrative dissolution under state law:

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3

1) X’s status as an S corporation is not terminated by reason of its administrative
dissolution under the laws of State;

2) X is not required to make a new election under § 1362(a);

3) The administrative dissolution and subsequent reincorporation of X under state
law did not, by itself, result in a distribution or transfer of property for purposes of
sections 301(a), 311(a)(2), 331(a), 336(a), or 351;

4) X’s administrative dissolution and subsequent reincorporation does not affect its
shareholders’ basis and holding periods in X stock; and

5) X may use the employer identification number assigned to it prior to its
administrative dissolution and is, therefore, not required to apply for the
assignment of a new employer identification number following its reincorporation.

    Except as expressly provided herein, 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 as to whether X is otherwise eligible to be an S corporation for federal tax purposes.

  This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

   The ruling contained in this letter is based upon information and representations

submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the ruling request, it is subject to verification on examination.

                                              Sincerely,



                                              James A. Quinn
                                              Senior Counsel, Branch 3
                                              Office of the Associate Chief Counsel
                                              (Passthroughs & Special Industries)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes