PLR 1340001: IRS restores S corporation status after an inadvertent shareholder transfer

Plain-English summary

The IRS determined that an S corporation's election terminated when its shares were transferred to an ineligible trust shareholder. The trust transferred the shares to an individual after the problem was discovered, and the corporation represented that its shareholders had continued to treat it as an S corporation and that the termination was not motivated by tax avoidance or retroactive planning. The IRS found the termination inadvertent and restored S corporation treatment from the transfer date, subject to the corporation's election otherwise being valid and not otherwise terminated. The corporation and its shareholders also agreed to make any adjustments required by the Secretary.

Ruling snapshot

• Question: Was the S corporation election's termination caused by the ineligible trust shareholder inadvertent, allowing relief under IRC § 1362(f)?
• Outcome: Approved, S corporation treatment restored
• Key authorities: IRC §§ 1361, 1362(d)(2), 1362(f), and 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201340001 Third Party Communication: None
Release Date: 10/4/2013 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
---------------------- --------------, ID No. ------------------
------------------------------- Telephone Number:
-------------------------------- ----------------------
----------------------------------- Refer Reply To:
CC:PSI:B01
PLR-102236-13
Date:
June 05, 2013

Legend:

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

     A                 =                  ------------------
     ---------------------------------------------------------------

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

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

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

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

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

     Date 4            =                 ------------------------

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

   This letter responds to your request, on behalf of X, dated December 31, 2012,

for a written determination granting relief under section 1362(f) of the Internal Revenue
Code.

                                                  Facts

PLR-102236-13 2

    X was incorporated under the laws of State on Date 1. X elected to be treated as

an S corporation effective Date 2. On Date 3, shares of X were transferred to Trust, an
ineligible shareholder. On Date 4, after discovery of the transfer to an ineligible
shareholder, Trust transferred its X shares to A, an individual.

   X represents that X’s shareholders have at all times since Date 2 treated X as an

S corporation and that the termination of X’s S election was not motivated by tax
avoidance or retroactive tax planning. X further represents that A has reported all tax
items allocated from X to Trust and paid all taxes related to those items for the period
during which Trust held X stock. X and its shareholders agree to make any adjustments
consistent with the treatment of X as an S corporation that may be required by the
Secretary.

                                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 the 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 nonresident alien as a shareholder, and (D) have more than 1
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 1st day of the 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); (2) the Secretary determines that the
circumstances resulting in such termination were inadvertent; (3) no later than a
reasonable period of time after discovery of the circumstances resulting in such
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 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 termination, such corporation shall be treated as an S
corporation during the period specified by the Secretary.

                                   Conclusion

PLR-102236-13 3

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

X’s S corporation election terminated on Date 3 because Trust was an ineligible
shareholder of X. We further conclude that the termination of X’s S corporation election
was an inadvertent termination within the meaning of § 1362( f). Under the provisions
of § 1362( f), X will be treated as an S corporation from Date 3, and thereafter, provided
that, apart from the inadvertent termination described above, X’s S corporation election
was otherwise valid and has not otherwise terminated under § 1362(d).

   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.

  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.

                                  Sincerely,


                                  Joy C. Spies
                                  Joy C. Spies
                                  Senior Technician Reviewer, Branch 1
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

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

cc: