PLR 1314006: IRS restores S corporation status and permits a late QSub election

Plain-English summary

A corporation's S corporation election was ineffective because one shareholder was not eligible to own S corporation stock. The corporation transferred that shareholder's stock to eligible shareholders and represented that the problem was inadvertent and not tax-motivated. The IRS treated the corporation as an S corporation from the specified effective date, assuming the election was otherwise valid and not terminated. The IRS also granted 120 days to file Form 8869 and make a late election to treat the corporation's wholly owned subsidiary as a qualified subchapter S subsidiary. The ruling required the shareholders to make the related pass-through and basis adjustments.

Ruling snapshot

• Question: Can the corporation retain S corporation treatment and make a late QSub election for its subsidiary?
• Outcome: Approved, subject to the stated conditions and a 120-day Form 8869 filing period.
• Key authorities: IRC §§ 1361, 1362, 1366, 1367, and 1368; Treas. Reg. §§ 1.1361-3 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201314006 Third Party Communication: None
Release Date: 4/5/2013 Date of Communication: Not Applicable
Index Number: 1362.04-00, 9100.00-00
Person To Contact:
--------------------------------------- ----------------------, ID No. ------------------
----------------------------------- Telephone Number:
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---------------------------------------- Refer Reply To:
CC:PSI:B02
PLR-128573-12
Date:
November 28, 2012

X = ------------------------------------------------------------------------------------------------------
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Y = ------------------------------------------------------------------------------------------------------
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Z = ------------------------------------------------------------------------------------------------------
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State = ------------

D1 = -----------------------

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

D3 = -----------------------

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

  This responds to a letter dated June 1, 2012, and subsequent correspondence

submitted on behalf of X by its authorized representative, requesting relief under
§ 1362(f) of the Internal Revenue Code for an ineffective S corporation election and an
extension of time pursuant to § 301.9100-3 of the Procedure and Administration
Regulations to make an election to treat Y as a qualified subchapter S subsidiary
(QSub) under § 1361(b)(3)(B)(ii).

  The information submitted states that X was incorporated under the laws of State

on D1 and elected to be an S corporation effective D2. On D2, X had an ineligible
PLR-128573-12 2

shareholder Z. Therefore, X’s S corporation election was ineffective on D2. X
represents that upon discovery of its error, it took remedial action. X transferred the
shares owned by Z to eligible S corporation shareholders on D3.

   X represents that the circumstances resulting in X’s ineffective S corporation

election were inadvertent and not motivated by tax avoidance. 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.

   On D2, X also owned the stock of Y. X represents that Y met the QSub

requirements under § 1361(b)(3)(B) at all times since D2 except that X failed to make
the election under § 1361(b)(3)(B)(ii) for Y. X also represents that X and its
shareholders have filed income tax returns consistent with the treatment of X as an S
corporation and Y as a QSub described in § 1361(b)(3)(B).

   RULINGS REQUESTED

  1. X requests a ruling under § 1362(f) that X will be treated as an S corporation

beginning on D2 and thereafter.

   2. X requests an extension of time under § 301.9100-3 to make a late QSub

election effective D2 on behalf of Y under § 1361(b)(3)(B)(ii).

   RULING 1

    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 such year.

  Section 1361(b)(1)(B) provides that a “small business corporation” means a

domestic corporation that is not an ineligible corporation and that does not 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.

    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 it was 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 such
ineffectiveness were inadvertent, (3) no later than a reasonable period of time after
discovery of the event resulting in the ineffectiveness, steps were taken (A) so that the
corporation is a small business corporation, or (B) to acquire the required 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
PLR-128573-12 3

corporation) as may be required by the Secretary with respect to such period, then,
notwithstanding the circumstances resulting in such ineffectiveness, the corporation
shall 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 X’s S corporation election was ineffective on D2, under § 1362(d)(2), because of
the ownership of X stock by an ineligible S corporation shareholder. We also conclude
that X’s ineffective S election was inadvertent within the meaning of § 1362(f).
Accordingly, pursuant to the provisions of § 1362(f), X will be treated as an S
corporation from D2, and thereafter, provided X’s S corporation election was valid and
was not otherwise terminated under § 1362(d).

   RULING 2

   Section 1362(a) generally provides that a small business corporation may elect to

be an S corporation.

    Section 1361(b)(3)(B) defines a QSub as a domestic corporation which is not an

ineligible corporation, if 100 percent of the stock of the corporation is owned by the S
corporation, and the S corporation elects to treat the corporation as a QSub.

    Section 1.1361-3(a) prescribes the time and manner for making an election to be

classified as a QSub.

   Section 1361-3(a)(4) provides that an election to treat an eligible subsidiary as a

QSub may be effective up to two months and 15 days prior to the date the election is
filed or not more than 12 months after the election is filed. The proper form making the
election is Form 8869, Qualified Subchapter S Subsidiary.

   Section 301.9100-1(c) provides that the Commissioner may grant a reasonable

extension of time to make a regulatory election, or a statutory election (but no more than
6 months except in the case of a taxpayer who is abroad), under all subtitles of the
Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-1(b) defines the
term “regulatory election” as an election whose due date is prescribed by a regulation
published in the Federal Register or a revenue ruling, revenue procedure, notice, or
announcement published in the Internal Revenue Bulletin.

   Sections 301.9100-1 through 301.9100-3 provide the standards the

Commissioner will use to determine whether to grant an extension of time to make the
election. Section 301.9100-2 provides the rules governing automatic extensions of time
for making certain elections. Section 301.9100-3 provides the standards the
Commissioner will use to determine whether to grant an extension of time for regulatory
elections that do not meet the requirements of § 301.9100-2. Under § 301.9100-3, a
request for relief will be granted when the taxpayer provides evidence to establish to the
PLR-128573-12 4

satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good
faith, and (2) granting relief will not prejudice the interests of the government.

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

that the requirements of § 301.9100-3 have been satisfied. Accordingly, X is granted an
extension of time of 120 days from the date of this ruling to file Form 8869 with the
appropriate service center to treat Y as a QSub effective D2. A copy of this letter
should be attached to the QSub election.

   All of X’s shareholders in determining their respective income tax liabilities must

include pro rata their share of separately stated items of income (including tax-exempt
income), loss, deduction, or credit, and nonseparately stated items of income or loss of
X as provided in § 1366, make any adjustments to basis as provided by § 1367, and
take into account any distributions made by X as provided in § 1368.

   Except as specifically set forth above, no opinion is expressed concerning the

federal tax consequences of the facts described above under any other provision of the
Code, including whether X was a small business corporation under § 1361(b), or
whether Y is a QSub within the meaning of § 1361(b)(3)(B).

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

the Code 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 X's authorized representative.

                                           Sincerely,

                                           Associate Chief Counsel
                                           (Passthroughs and Special Industries)



                                       By: __________________
                                          Charlotte Chyr
                                          Senior Technician Reviewer, Branch 2
                                          Office of the Associate Chief Counsel
                                          (Passthroughs & Special Industries)

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

cc: