PLR 201351014: S corporation election restored after an ineligible shareholder's ownership

Plain-English summary

A corporation's S corporation election terminated when an ineligible shareholder became the owner of its stock. The corporation removed that shareholder through corrective action and represented that the termination was not motivated by tax avoidance or retroactive tax planning. The IRS ruled that the termination was inadvertent and that the corporation would continue to be treated as an S corporation during the specified period, provided the election was valid, had not otherwise terminated, and the corporation and shareholders reported consistently with that treatment.

Ruling snapshot

• Question: May an S corporation election be treated as continuing after an inadvertent termination caused by an ineligible shareholder?
• Outcome: Approved
• Key authorities: IRC §§ 1361, 1362(f)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201351014
Third Party Communication: None
Release Date: 12/20/2013
Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
---------------------------------------------------------- -----------------------, ID No. --------------
------------------------------------
Telephone Number:
----------------------------------------------- ----------------------
------------------------------
Refer Reply To:
CC:PSI:B02
PLR-130244-13
Date:
September 06, 2013

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

Y = --------------------------------------------------------------------------------------------------------------
-----------------------------------

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

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

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

State = -------------------
--------------------------------------------------------------------------------------------------------------
A = --------------------------------------------------------------------------------------------------------------
--

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

This letter responds to a letter dated June 27, 2013, submitted on behalf of X, requesting relief under § 1362(f) of the Internal Revenue Code.

The information submitted states that X was incorporated in State and elected to be an S corporation effective D1. X’s election was inadvertently terminated effective D2 when Y, an ineligible shareholder, became the owner of X stock. X represents that it has taken corrective action such that Y is no longer be a shareholder of X. A, an individual, was the owner of Y and was the indirect owner of the X stock after the corrective action.
PLR-130244-13
2

X represents that the termination was not motivated by tax avoidance or retroactive tax planning. 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.

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 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 the ineffectiveness or termination were inadvertent, (3) no later than a reasonable period of time after discovery of the event resulting in the ineffectiveness or termination, 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 solely on the facts submitted and the representations made, we conclude that the termination of X’s S corporation election on D2 was inadvertent within the meaning of § 1362(f). We further hold that, pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S corporation during the period beginning on D2 and ending on D3, provided X’s S corporation election was valid and provided that the election was not otherwise terminated under § 1361(d).

This ruling is contingent on X and all of X’s shareholders during the period beginning on D2 and ending on D3 treating X as having been an S corporation during that period. A shall be treated as the owner of the shares held by Y during this period. If X or its shareholders including A fail to treat themselves as described above, this ruling shall be null and void.

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 who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
PLR-130244-13
3

Pursuant to a power of attorney on file with this office, a copy of this letter is being forwarded to X’s authorized representative.

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 purposes