PLR 1312023: IRS permits an S corporation to re-elect S status early

Plain-English summary

The IRS permitted a corporation whose S election had terminated after shares were transferred to an ineligible shareholder to re-elect S corporation status before the usual five-year waiting period ended. The IRS noted that a majority shareholder who did not own shares when the termination occurred and the absence of ineligible shareholders supported consent. It also found reasonable cause for the corporation's late election. The corporation had 120 days to file Form 2553 for the new election to be treated as timely.

Ruling snapshot

• Question: Could the corporation re-elect S corporation status before the five-year waiting period and file the election late?
• Outcome: Approved, early re-election and late-election relief were granted.
• Key authorities: IRC §§ 1361 and 1362; Treas. Reg. § 1.1362-5(a)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201312023 Third Party Communication: None
Release Date: 3/22/2013 Date of Communication: Not Applicable
Index Number: 1362.01-02, 1361.01-03
Person To Contact:
------------------------------- --------------------, ID No. ------------------
------------------------------ Telephone Number:
--------------------------------------------- ----------------------
-------------------------------- Refer Reply To:
CC:PSI:B02
PLR-144679-12
Date:
December 03, 2012

X: ------------------------------
-------------------------

Date 1: -------------------------
Date 2: -----------------------
Date 3: -------------------
Date 4: ---------------------
Date 5: -----------------
State: --------------

A: ---------------------------

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

  This letter responds to your letter dated October 5, 2012, and subsequent

correspondence, requesting relief under § 1362 of the Internal Revenue Code.

    The information submitted states that X was formed in State on Date 1 and that it

elected to be treated as an S corporation effective Date 2. On Date 3, X’s S election
terminated upon the transfer of shares in X to an ineligible shareholder. Effective Date
4, there is a majority shareholder, A, who was not a shareholder of X on Date 3. Also
effective Date 4, there are no ineligible shareholders of X. X requests permission to be
an S corporation, effective Date 5. Date 5 is prior to the expiration of the five-year
waiting period imposed by § 1362(g), but the due date for a timely S election effective
Date 5 has passed.

  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.

   Section 1362(b)(5) provides that if – (A) an election under § 1362(a) is made for

any taxable year after the date prescribed by § 1362(b) for making such election for
such taxable year or no such election is made for any taxable year, and (B) the
Secretary determines that there was reasonable cause for the failure to timely make
such election, the Secretary may treat such an election as timely made for such taxable
year.

    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 Date 5. In addition, we conclude that X has established
reasonable cause for failing to make a timely election to be an S corporation effective
Date 5. Accordingly, provided that X makes an election to be an S corporation by filing a
completed Form 2553 with the appropriate service center effective Date 5 within 120
days following the date of this letter, then such election will be treated as timely made
for X's taxable year beginning Date 5. 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.

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

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

   Pursuant to a power of attorney on file with this office, a copy of this letter is

being sent to your authorized representative.

                                           Sincerely,


                                           Bradford R. Poston
                                           Senior Counsel, Branch 2
                                           Office of the Associate Chief Counsel
                                           (Passthroughs and Special Industries)

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

cc: