PLR 1324011: IRS treats a corporation as an S corporation after an inadvertent election problem

Plain-English summary

The IRS considered whether a corporation's S corporation election was ineffective at the start because the corporation had no shareholders, assets, or business activity. The corporation later issued stock, acquired assets, and began doing business, and its S corporation election later terminated. The IRS determined that any initial ineffectiveness was inadvertent and allowed the corporation to be treated as an S corporation from the later date through the termination date. The ruling was conditioned on the election not otherwise being ineffective or terminated and on the corporation otherwise satisfying the applicable requirements.

Ruling snapshot

• Question: Could the corporation be treated as an S corporation after an initially ineffective election under IRC § 1362(f)?
• Outcome: Approved, subject to the stated conditions.
• Key authorities: IRC §§ 1361(a)(1) and 1362(f); Treas. Reg. § 1.1362-6(a)(2)(ii)(C).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201324011 Third Party Communication: None
Release Date: 6/14/2013 Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.04-00
Person To Contact:
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Refer Reply To:
CC:PSI:B03
PLR-149146-12
Date:
February 11, 2013

                                                  LEGEND

X = --------------------------------------------------------------------------------------------
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Shareholders = --------------------------------------------------------------------------------------------
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State = ------------

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

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

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

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

   This responds to a letter dated November 14, 2012, submitted on behalf of X by

X’s authorized representative requesting a ruling under § 1362(f) of the Internal
Revenue Code.

                                                  FACTS

PLR-149146-12 2

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

on Date 1, and elected to be an S corporation effective Date 1. X’s election may have
been ineffective on Date 1 because X did not have assets, did not begin doing
business, and may not have had shareholders. On Date 2, X issued its first shares of
stock to Shareholders, acquired assets, and began doing business. X’s S corporation
election terminated on Date 3. X requests a ruling that it will be treated as an S
corporation from Date 2 to Date 3.

   X represents that if X’s S election is invalid then the circumstances resulting in

such invalidity were inadvertent and were not motivated by tax avoidance or retroactive
tax planning. X and Shareholders have agreed to make any adjustments that the
Commissioner may require, consistent with the treatment of X as an S corporation.

                              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 such year.

  Section 1.1362-6(a)(2)(ii)(C) provides, in relevant part, that the taxable year of a

new corporation begins on the date that the corporation has shareholders, acquires
assets, or begins doing business, whichever is to occur first. The existence of
incorporators does not necessarily begin the taxable year of a new corporation.

    Section 1362(f) provides 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(d)(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 circumstances resulting in such ineffectiveness, steps
were taken so that the corporation for which the election was made is a small business
corporation, and (4) the corporation for which the election was made, and each person
who was a shareholder in such corporation at any time during the period specified
pursuant to 1362(f), agrees to make such adjustments (consistent with the treatment of
such 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, such corporation shall be treated as an S corporation during the period
specified by the Secretary.

                                 CONCLUSION

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

if X had no shareholders on Date 1, X’s S corporation was ineffective on Date 1
because it did not own any assets and did not begin doing business. However, we
PLR-149146-12 3

conclude that, if X’s S election was ineffective, such ineffectiveness 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 Date 2 to Date 3, provided that X’s election to
be an S corporation was not otherwise ineffective and was not otherwise terminated
under § 1362(d).

    Except as expressly provided herein, we express or imply no opinion concerning

the tax consequences of any aspect of any transaction or item discussed or referenced
in this letter. Specifically, we express no opinion on whether X is otherwise eligible to
be treated as an S corporation.

  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.

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter to your authorized representative.

   The ruling contained in this letter is based upon information and representations

submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the ruling request, it is subject to verification on examination.

                                  Sincerely,



                                  Richard T. 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

cc: