Late entity-classification and S corporation elections granted relief

Plain-English summary

An entity asked for more time to elect corporate classification for federal tax purposes and to make a late S corporation election. The entity’s sole member intended both elections to be effective on a specified date, but neither Form 8832 nor Form 2553 was timely filed. The IRS found that the entity had acted reasonably and in good faith and that granting relief would not prejudice the government. It granted 120 days to file Form 8832 and allowed S corporation treatment from the requested effective date if the entity otherwise qualified and timely filed Form 2553 during that period.

Ruling snapshot

• Question: Could the entity receive relief for late entity-classification and S corporation elections?
• Outcome: Approved, with a 120-day filing period.
• Key authorities: IRC §§ 1362 and 6110(k)(3); Treas. Reg. §§ 301.7701-2, 301.7701-3, and 301.9100-1 through 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201403003
Third Party Communication: None
Release Date: 1/17/2014
Date of Communication: Not Applicable
Index Number: 1362.01-03
Person To Contact:
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--------------, ID No. ----------------
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Refer Reply To:
CC:PSI:B01
PLR-116778-13
Date:
September 13, 2013

LEGEND

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

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

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

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

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

This responds to a letter dated March 6, 2013, and subsequent correspondence, submitted on behalf of X, requesting an extension of time under § 301.9100-3 of the Procedure and Administration Regulations to file an election under § 301.7701-3 to be treated as a corporation for federal tax purposes, and relief to file a late S corporation election under § 1362(b)(5) of the Internal Revenue Code.

FACTS

According to the information submitted, X was formed on D1 under the laws of State. X‘s sole member intended to treat X as an association taxable as a corporation and to elect to be treated as an S corporation for federal tax purposes, with both elections effective D2. However, neither Form 8832, Entity Classification Election, nor Form 2553, Election by a Small Business Corporation, was timely filed for X.

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X represents that it acted reasonably and in good faith, and that the interests of the government will not be prejudiced by granting relief. X further represents that no hindsight is involved in seeking the relief requested.

LAW AND ANALYSIS

Section 301.7701-3(a) provides that a business entity is not classified as a corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) (an eligible entity) can elect its classification for federal tax purposes. Elections are necessary only when an eligible entity does not want to be classified under the default classification or when an eligible entity chooses to change its classification.

Section 301.7701-3(b)(2)(i) provides that, except for certain existing entities described in § 301.7701-3(b)(3), unless a domestic eligible entity elects otherwise, the entity is (A) a partnership if it has two or more members; or (B) disregarded as an entity separate from its owner if it has a single owner.

Section 301.7701-3(c)(1)(i) provides that an eligible entity may elect to be classified other than as provided under § 301.7701-3(b)(2) by filing Form 8832 with the appropriate service center. Under § 301.7701-3(c)(1)(iii), this election will be effective on the date specified by the entity on Form 8832 or on the date filed if no such date is specified. The date specified on Form 8832 cannot be more than 75 days prior to the date on which the election is filed and no more than 12 months after the date the election is filed.

Section 301.9100-1(c) provides that the Commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301. 9100-1(b) provides that the term “regulatory election” includes an election whose due date is prescribed by a regulation published in the Federal Register.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make the election. Section 301.9100-2 provides the rules governing automatic extensions of time for making certain elections. Section 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time for the regulatory elections that do not meet the requirements of § 301.9100-2. Under § 301.9100-3, a request for relief will be granted when a taxpayer provides evidence to establish to the satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good faith, and (2) granting relief will not prejudice the interests of the government.

Section 1362(a) provides that a small business corporation may make an election to be an S corporation.

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Section 1362(b) provides the rule on when an S election will be effective. Section 1362(b)(2) provides, in relevant part, that if an S election is made within the first two and one-half months of a corporation's taxable year, then the corporation will be treated as an S corporation for the year in which the election is made. Under § 1362(b)(3), an S election made after the first two and one-half months of a corporation's taxable year, results in the corporation not be treated as an S corporation until the taxable year following the year in which the S election is filed.

Section 1362(b)(5) provides that if (A) an election under § 1362(a) is made for any taxable year after the date prescribed by § 1362(b) for making the election for the taxable year or no § 1362(a) 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, then the Secretary may treat the election as timely made for such taxable year and § 1362(b)(3) shall not apply.

CONCLUSION

Based solely on the facts submitted and representations made, we conclude that X has satisfied the requirements of §§ 301.9100-1 and 301.9100-3. Accordingly, X is granted an extension of time of one hundred twenty (120) days from the date of this letter to elect to be treated as an association taxable as a corporation for federal tax purposes effective D2. The election should be made by filing a properly executed Form 8832 with the appropriate service center. A copy of this letter should be attached to the election.

In addition, we conclude that X has established reasonable cause for failing to timely make an election to be an S corporation and, thus, is eligible for relief under
§ 1362(b)(5). Provided that X otherwise qualifies as an S corporation, we conclude that X will be recognized as an S corporation effective D2, if X files a completed Form 2553 effective D2 with the appropriate service center within 120 days from the date of this letter. A copy of this letter should be attached to the election.

Except as expressly set forth herein, no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the Code, including whether X is otherwise eligible to be an S corporation for federal tax purposes.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

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Pursuant to a power of attorney on file with this office, a copy of this letter is being sent to X's authorized representatives.

Sincerely,

Associate Chief Counsel
(Passthroughs & Special Industries)

By: Laura Fields
Laura Fields
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