Inadvertent S corporation termination relief granted

Plain-English summary

An S corporation may have had an ineligible shareholder for a period, which could have terminated its S election. The corporation represented that its eligible shareholders filed returns consistent with S corporation treatment, the possible termination was inadvertent and not tax-motivated, and all affected parties would make required adjustments. The IRS granted relief under IRC § 1362(f). The corporation would be treated as continuing to be an S corporation during and after the affected period unless its election was otherwise terminated.

Ruling snapshot

• Question: Was the possible termination caused by an ineligible shareholder inadvertent, allowing continued S corporation treatment?
• Outcome: Approved
• Key authorities: IRC §§ 1361 and 1362(d), (f)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201443014 Third Party Communication: None
Release Date: 10/24/2014 Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.01-00,
1362.02-00, 1362.02-02 Person To Contact:
---------------------------, ID No. -------------
---------------------------------- Telephone Number:

------------------------- Refer Reply To:
-------------------------------- CC:PSI:B01
PLR-122290-14
Date:
July 10, 2014

LEGEND

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

State = ------------
D1 = ----------------

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

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

D4 = ----------------

a = -------

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

This responds to the letter dated June 3, 2014, and subsequent correspondence,
submitted on behalf of X, requesting relief under § 1362(f) of the Internal Revenue
Code.

Facts

According to the information submitted, X was incorporated under the laws of
State on D1 and elected to be an S corporation for federal tax purposes effective D2.
Between D3 and D4, a shares of X's stock may have been owned by an ineligible S
corporation shareholder and therefore inadvertently terminated X's S corporation
election. X represents that its eligible shareholders have filed all federal income tax
returns consistent with X's S corporation election. Moreover, X represents that the
circumstances resulting in the possible termination of X's S corporation election were
inadvertent and were not motivated by tax avoidance. X and its shareholders have

PLR-122290-14 2

agreed to make such adjustments, consistent with the treatment of X as an S
corporation, as may be required by the Service

Law

Section 1361(a)(1) defines an “S corporation” as a small business corporation for
which an election under § 1362(a) is in effect.

Section 1361(b)(1) defines a “small business corporation” as a domestic
corporation which is not an ineligible corporation which does not (A) have more than
100 shareholders, (B) have as a shareholder a person (other than an estate, a trust
described in subsection (c)(2), or an organization described in subsection (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) the Secretary determines that the
circumstances resulting in the termination were inadvertent, (3) no later than a
reasonable period of time after the discovery of the circumstances resulting in the
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 of inadvertent termination of the S election, agrees to makes 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 the termination, the corporation is treated as an S corporation
during the period specified by the Secretary.

Conclusion

Based solely on the representations made and the information submitted, we
conclude that X's S corporation election may have terminated because X may have had
an ineligible shareholder. However, we conclude that, if X's S corporation election was
terminated, such a termination was inadvertent within the meaning of § 1362(f).
Consequently, we rule that X will be treated as continuing to be an S corporation from
D3 to D4 and thereafter, provided that X's S corporation election is not otherwise
terminated under § 1362(d).

Except for the specific ruling above, we express or imply no opinion concerning

PLR-122290-14 3

the federal tax consequences of the facts of this case under any other provision of the
Code. Specifically, no opinion is expressed concerning whether X was otherwise
eligible to be 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 the power of attorney on file with this office, we are sending a
copy of this letter to X's authorized representatives.

Sincerely,

Laura C. Fields
Laura C. Fields
Senior Technician Reviewer
Office of Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures (2):

Copy of this letter,
Copy for § 6110 purposes