PLR 1323013: IRS grants late-election and inadvertent-ineffectiveness relief for S corporation status

Plain-English summary

The IRS considered a corporation whose intended S corporation election had the wrong effective date and ownership information, was signed by an unauthorized person for a trust shareholder, and lacked a properly filed electing small business trust election. The IRS found reasonable cause for the late election and granted relief under section 1362(b)(5). It also found that the intended S corporation election would have been inadvertently ineffective because the trust was initially an ineligible shareholder. The corporation will be treated as an S corporation from the requested effective date if the required elections are filed within 120 days and the corporation and its shareholders consistently report the treatment.

Ruling snapshot

• Question: Can the corporation receive relief for a late S corporation election and an election that would have been inadvertently ineffective?
• Outcome: Approved, relief was granted under IRC §§ 1362(b)(5) and 1362(f), subject to filing and reporting conditions.
• Key authorities: IRC §§ 1361, 1362(b)(5), and 1362(f)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201323013 Third Party Communication: None
Release Date: 6/7/2013 Date of Communication: Not Applicable
1362.01-03, 1362.04-00
Person To Contact:
--------------------------------- -----------------------, ID No. --------------
-------------------------- Telephone Number:
----------------------------------------- ----------------------
------------------------------- Refer Reply To:
CC:PSI:B02
PLR-147726-12
Date:
January 25, 2013

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

Trust = -----------------------------------------------------------------------------------------------------
-------------------------------------------

Individual = -----------------------------------------------------------------------------------------------------
---------------------------------------------

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

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

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

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

This letter responds to a letter dated November 1, 2012, submitted on behalf of X by its
authorized representatives requesting a ruling under §§ 1362(b)(5) and 1362(f) of the
Internal Revenue Code.

The information submitted states that X was incorporated in State on Date 1. Since
Date 1, X has had two shareholders, Trust and Individual. X’s officers intended that X
elect S corporation treatment effective Date 1; however, a Form 2553, Election by a
Small Business Corporation, incorrectly identified the effective date of the election as
Date 2 and incorrectly reported the percentage of ownership that Trust and Individual
held in X. In addition, an individual who was not an authorized signatory of Trust signed
the Form 2553 on behalf of Trust, therefore making the election ineffective. Also,
X represents that Trust qualifies as an electing small business trust (“ESBT”) within the
meaning of § 1361(e). However, no ESBT election was properly filed for Trust.
PLR-147726-12 2

X represents that it meets all of the requirements to be a small business corporation
under § 1361(b) effective Date 1. Further, X represents that its failure to file an ESBT
election was inadvertent. X and its shareholders agree to make any adjustments
consistent with the treatment of X as an S corporation as may be required by the
Secretary.

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)(B) provides that the term “small business corporation” means a
domestic corporation which is not an ineligible corporation and which 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(a)(1) provides that except as provided in § 1362(g), a small business
corporation may elect, in accordance with the provisions of § 1362, to be an S
corporation. Section 1362(b)(1) provides that an election under § 1362(a) may be made
by a small business corporation for any taxable year (A) at any time during the
preceding taxable year, or (b) at any time during the taxable year and on or before the
15th day of the third month of the taxable year.

Section 1362(b)(5) provides that if (A) an election under § 1362(a) is made for any
taxable year (determined without regard to § 1362(b)(3), 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 the election, the Secretary may treat such an election as
timely made for the taxable year (and § 1362(b)(3) shall not apply).

Section 1362(f) provides, in part, that if (1) an election under § 1362(a) by any
corporation was not effective for the taxable year for which 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, (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
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 on the facts submitted and representations made, we conclude that X
established reasonable cause for failing to make a timely election to be an S corporation
PLR-147726-12 3

effective Date 1. Thus we conclude that X is eligible for relief under § 1362(b)(5).
Accordingly, if X makes an election to be an S corporation by filing a completed Form
2553 with the appropriate service center effective Date 1 within 120 days following the
date of this letter, then such election will be treated as timely made. A copy of this letter
should be attached to the Form 2553.

X failed to timely file an election to be treated as an S corporation effective Date 1. Had
X filed the election, it would have been ineffective because Trust was an ineligible
shareholder on Date 1. Based solely on the facts submitted and representations made,
we conclude that X’s election to be treated as an S corporation effective Date 1 would
have been ineffective and conclude that the ineffectiveness would have been
inadvertent within the meaning of § 1362(f). Under the provisions of § 1362(f), X will be
treated as an S corporation effective Date 1, and thereafter, provided that X’s S
corporation is not otherwise terminated under § 1362(d).

This ruling is contingent on X and its shareholders filing their federal income tax returns
consistent with X being an S corporation. This ruling is also contingent on the trustee of
Trust filing an ESBT election effective Date 1, with the appropriate service center. The
ESBT election must be filed within 120 days following the date of this letter. A copy of
this letter should be attached to the ESBT election. If X or its shareholders fail to treat
themselves as described above, this ruling shall be null and void.

Except for the specific rulings above, we express no opinion concerning the federal tax
consequences of the facts described above under any other provision of the Code.
Specifically, we express or imply no opinion as to whether X otherwise qualifies as a
subchapter S corporation under § 1361 or the qualification of Trust as an ESBT.

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, we are sending a copy of this letter to X’s authorized
representatives.

                                   Sincerely,



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

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