PLR 1322006: IRS restores S corporation treatment after an inadvertent termination

Plain-English summary

The IRS ruled that a corporation's S election was inadvertently terminated when one of its shareholders became ineligible. The corporation represented that the termination was not motivated by tax avoidance or retroactive tax planning, that it and its eligible shareholders filed returns consistently with S corporation treatment, and that they would make any required adjustments. Under section 1362(f), the IRS treated the corporation as an S corporation from the termination date onward, provided it remained otherwise eligible and the election was not terminated for another reason. The ruling addressed only the section 1362(f) relief requested.

Ruling snapshot

• Question: Could the corporation retain S corporation treatment after its election was inadvertently terminated by an ineligible shareholder?
• Outcome: Approved
• Key authorities: IRC §§ 1361 and 1362; IRC § 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201322006 Third Party Communication: None
Release Date: 5/31/2013 Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.04-00
Person To Contact:
------------------------- -----------------------, ID No. -------------------
--------------------- ---------------------------------------------------
---------------------------- Telephone Number:
-------------------------------- ----------------------
-------------------------------- Refer Reply To:
CC:PSI:B03
PLR-120924-12
Date:
January 14, 2013

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

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

Y = ----

D1 = -------

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

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

  This responds to a letter dated April 16, 2012, and subsequent correspondence

submitted on behalf of X, requesting a ruling under § 1362(f) of the Internal Revenue
Code.

                                                 Facts

   According to the information submitted, X was incorporated in State on D1 and

made an election to be treated as an S corporation. X represents that one of its
shareholders became an ineligible S corporation shareholder as of D2 and therefore
terminated inadvertently X’s S corporation election. X represents that the termination
was not motivated by tax avoidance or retroactive tax planning. X represents that from
D2 onward, X and its eligible shareholders have filed all federal income tax returns
consistent with X’s S corporation election. X and its shareholders have agreed to make
any adjustments that the Commissioner may require, consistent with the treatment of X
as an S corporation.
PLR-120924-12 2

                                 Law and Analysis

  Section 1361(a)(1) defines an “S corporation” as a small business corporation for

which an election under § 1362(a) is in effect for the taxable year.

   Section 1361(b)(1) defines a “small business corporation” as a domestic

corporation that is not an ineligible corporation and that 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 non-resident alien as a shareholder, and (D) have more than one
class of stock.

   Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be

terminated whenever (at any time on or after the first day of the first taxable year for
which the 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) or (3); (2) the Secretary determines that
the circumstances resulting in the termination were inadvertent; (3) no later than a
reasonable period of time after 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; and (4) the corporation for which the termination
occurred, and each person who was a shareholder in the corporation at any time during
the period specified pursuant to § 1362(f), agrees to make the 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 termination, the corporation shall be treated as an S corporation during the period
specified by the Secretary.

                                    Conclusion

   Based solely on the representations made and the information submitted that X’s

S corporation election may have terminated because X may have had an ineligible
shareholder, we conclude that if X’s S corporation election was terminated, such a
termination was inadvertent within the meaning of § 1362(f). Therefore, pursuant to the
provisions of § 1362(f), X will be treated as an S corporation from D2 and thereafter,
provided X is otherwise eligible to be an S corporation and provided that the election
was not otherwise terminated under § 1362(d).
PLR-120924-12 3

    Except as specifically ruled above, we express no opinion concerning the federal

tax consequences of the transactions described above under any other provisions of the
Code. This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent. Pursuant to a power of attorney
on file, a copy of this letter is being sent to X’s authorized representative.

                                 Sincerely,




                                 Richard Probst
                                 Senior Technician Reviewer, Branch 3
                                 Office of the Associate Chief Counsel
                                 (Passthroughs & Special Industries)

Enclosures: 2
Copy of this letter
Copy for § 6110 purposes