PLR 1301003: IRS restores S corporation treatment after an inadvertent termination

Plain-English summary

An S corporation's election terminated after another S corporation acquired shares, creating an ineligible shareholder. The taxpayer represented that the termination was inadvertent and was not motivated by tax avoidance or retroactive tax planning. The IRS concluded that the election termination was inadvertent under section 1362(f), restored S corporation treatment for the specified period, and treated the corporation as a qualified subchapter S subsidiary after the parent acquired all remaining shares. The relief required the parent to file Form 8869 within 120 days to make the QSub election effective on the specified date.

Ruling snapshot

• Question: Could an S corporation receive relief after its election terminated because another S corporation became an ineligible shareholder?
• Outcome: Approved, subject to a QSub election
• Key authorities: IRC §§ 1361 and 1362(f)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201301003 Third Party Communication: None
Release Date: 1/4/2013 Date of Communication: Not Applicable
Index Number: 1362.04-00, 1361.05-00
Person To Contact:
------------------------------ --------------, ID No. -----------------
------------------------------------------------------------ Telephone Number:

• ---

  
  ------------------------ Refer Reply To:
  ----------------------------------- CC:PSI:B01
  PLR-114946-12
  Date:
  September 26, 2012

LEGEND

X = -------------------------------------------------

Y-------------------------=-------------------------------------

Date 1 = -------------------------

Date 2 = ----------------------------

Date 3 = ----------------------

Date 4 = ------------------

Date 5 = --------------------------

Date 6 = -----------------

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

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

This responds to a letter dated March 29, 2012, and subsequent correspondence,
submitted on behalf of X by X’s authorized representative, requesting relief under
section 1362(f) of the Internal Revenue Code (the Code).

PLR-114946-12 2

FACTS

According to the information submitted and representations made, X was incorporated
on Date 1 under the laws of State and elected to be treated as an S corporation
effective Date 2.

On Date 3, Y, another S corporation, acquired shares in X, thus causing a termination of
X’s S corporation election. Y acquired additional shares in X on Date 4. On Date 6,
after discovering the termination, Y acquired all of the outstanding shares of X that Y
did not already own.

X represents that the termination of its S corporation election was inadvertent and was
not motivated by tax avoidance or retroactive tax planning. X also represents that X
and its shareholders agree to make any adjustments required as a condition of
obtaining relief under the inadvertent termination rule as provided in § 1362(f) that may
be required by the Secretary.

LAW AND ANALYSIS

Section 1361(a)(1) provides that the term “S corporation” means, with respect to any
taxable year, a small business corporation for which an election under § 1362(a) is in
effect for the year. Section 1361(b)(1) defines a “small business corporation” as a
domestic corporation which is not an ineligible corporation and which does not (A) have
more than 100 shareholders, (B) have as a shareholder a person (other than an estate,
a trust described in § 1361(c)(2), or an organization described in § 1361(c)(6)) who is
not an individual, (C) have a nonresident alien as a shareholder, and (D) have more
than 1 class of stock.

Section 1361(b)(3)(A) provides that, except as provided in regulations prescribed by the
Secretary, for purposes of the Code – (i) a corporation which is a qualified subchapter S
subsidiary (QSub) shall not be treated as a separate corporation, and (ii) all assets,
liabilities, and items of income, deduction, and credit of a QSub shall be treated as
assets, liabilities, and such items (as the case may be) of the S corporation.

Section 1361(b)(3)(B) defines QSub as a domestic corporation that is not an ineligible
corporation, if 100 percent of the stock of the corporation is owned by an S corporation
and the S corporation elects to treat the corporation as a QSub.

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 taxable year for which the

PLR-114946-12 3

corporation is an S corporation) such corporation ceases to be a small business
corporation.

Section 1362(f) provides in part that if (1) an election under § 1362(a) by any
corporation was terminated under § 1362(d), (2) the Secretary determines that the
circumstances resulting in the termination were inadvertent, (3) no later than a
reasonable period of time after the discovery of the circumstances resulting in the
termination, steps were taken so that the corporation for which the termination occurred
is a small business corporation or a QSub, as the case may be, and (4) the corporation
for which the termination occurred, and each person who was a shareholder in such
corporation at any time during the period of inadvertent termination of the S election,
agrees to makes such adjustments (consistent with the treatment of the corporation as
an S corporation or a QSub, as the case may be) as may be required by the Secretary
with respect to such period, then, notwithstanding the circumstances resulting in the
termination, the corporation is treated as an S corporation during the period specified by
the Secretary.

CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that
X’s S corporation election terminated on Date 3 because X had an ineligible
shareholder. We further conclude that the termination of X’s S corporation election was
inadvertent within the meaning of § 1362(f). Therefore, X will be treated as an S
corporation from Date 3 through Date 5, provide X’s S corporation election was valid
and not otherwise terminated under § 1362(d). We further conclude that X will be
treated as a QSub effective Date 6 and thereafter, provided that X’s QSub election is
valid and not terminated under § 1361(b)(3)(C).

In addition, as a condition to this ruling, Y must, within 120 days from the date of this
letter, elect to treat X as a QSub for federal tax purposes effective Date 6. The election
should be made by filing Form 8869, Qualified Subchapter S Subsidiary Election, with
the appropriate service center. A copy of this letter should be attached to the election.

Except as specifically ruled upon above, we express or imply no opinion concerning the
federal tax consequences of the facts of this case under any other provision of the
Code. Specifically, we express or imply no opinion regarding X’s eligibility to be an S
corporation or a QSub.

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

PLR-114946-12 4

Pursuant to the power of attorney on file with this office, we are sending a copy of this
letter to your authorized representative.

                                  Sincerely,


                                  Joy C. Spies
                                  Joy C. Spies
                                  Senior Technician Reviewer, Branch 1
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

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