Missing shareholder consent treated as inadvertent

Plain-English summary

A corporation timely filed an S-corporation election, but its sole shareholder did not properly consent, making the election ineffective. The corporation and shareholder had consistently treated the company as an S corporation and represented that the error involved no tax avoidance or retroactive planning. The IRS found the ineffectiveness inadvertent under section 1362(f) and treated the corporation as an S corporation from the intended effective date, assuming the election was otherwise valid. The corporation had 120 days to file a completed Form 2553 with the shareholder's proper consent.

Ruling snapshot

• Question: Whether a missing shareholder consent made the S-corporation election eligible for inadvertent-election relief
• Outcome: Approved, conditioned on filing a properly consented Form 2553 within 120 days
• Key authorities: I.R.C. §§ 1361, 1362(a), 1362(f)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201539019                                             Third Party Communication: None
Release Date: 9/25/2015                                       Date of Communication: Not Applicable
Index Numbers:1362.00-00, 1362.01-01,
              1362.04-00                                      Person To Contact:
                                                              -----------------------, ID No. -------------------
----------------------------------------------                ---------------------------------------------------
--------------------------------------------------------      Telephone Number:
-------------------------------                               --------------------
 ---------------------------------                            Refer Reply To:
                                                              CC:PSI:B3
                                                              PLR-104487-15
                                                              Date:
                                                              June 23, 2015




                                                     Legend

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

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

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

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


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

       This letter responds to a letter dated January 27, 2015, and subsequent
correspondence, submitted on behalf of X by its authorized representative, requesting a
ruling under § 1362(f) of the Internal Revenue Code (Code).

                                                      Facts

       The information submitted states that X was incorporated under the laws of State
on Date 1. A is the sole shareholder of X. X represents that it timely filed an election to
be treated as an S corporation effective Date 1. However, A failed to consent properly
to X’s S corporation election. Accordingly, X’s S corporation election was ineffective.

        X represents that there was no tax avoidance or retroactive tax planning involved
in the failure of A to properly execute X’s Form 2553, Election by a Small Business
Corporation. X and A represent that they have treated X as an S corporation since Date
PLR-104487-15                                2

1. In addition, X and A agree to make any adjustments consistent with the treatment of
X as an S corporation as 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 such year.

       Section 1361(b)(1)(B) provides that the term “small business corporation” means
a domestic corporation that is not an ineligible corporation and that does not, among
other requirements, 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.

      Section 1362(a)(1) provides that, except as provided in § 1362(g), a small
business corporation may elect, in accordance with the provisions of § 1362, to be an S
corporation.

        Section 1362(a)(2) provides that an election under § 1362(a) shall be valid only if
all persons who are shareholders in such corporation on the day on which such election
is made consent to such election.

        Section 1362(f) provides that if (1) an election under § 1362(a) or
§ 1361(b)(3)(B)(ii) by any corporation (i) 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 (ii) was terminated
under § 1362(d)(2) or (3) or § 1361(b)(3)(C); (2) the Secretary determines that the
circumstances resulting in such ineffectiveness or termination were inadvertent; (3) no
later than a reasonable period of time after discovery of the circumstances resulting in
such ineffectiveness or termination, steps were taken so that the corporation for which
the election was made or the termination occurred is a small business corporation or a
QSub, as the case may be, or to acquire the required shareholder consents; and (4) the
corporation for which the election was made or the termination occurred, and each
person who was a shareholder of the corporation at any time during the period specified
pursuant to § 1362(f), agrees to make the adjustments (consistent with the treatment of
the corporation as an S corporation or a QSub, as the case may be) as may be required
by the Secretary with respect to this period, then, notwithstanding the circumstances
resulting in such ineffectiveness or termination, the corporation shall be treated as an S
corporation or a QSub, as the case may be, during the period specified by the
Secretary.
PLR-104487-15                                3


                                       Conclusion

       Based solely on the facts submitted and representations made, we conclude that
X’s S corporation election was ineffective due to the failure to obtain A’s consent to the
S corporation election and that the ineffectiveness was inadvertent within the meaning
of § 1362(f). Consequently, under § 1362(f), X will be treated as an S corporation from
Date 1 and thereafter provided that X’s S corporation election was otherwise valid and
not otherwise terminated under § 1362(d).

        As a condition of the ruling, within one hundred twenty (120) days from the date
of this letter, X must file a completed Form 2553 with the proper consent of A with the
appropriate service center. A copy of this letter should be attached to the Form 2553.

       Except as specifically ruled above, we express or imply no opinion concerning
the federal tax consequences of the facts described above under any other provision of
the Code, including whether X was otherwise a valid S corporation.

       This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)
of the Code provides that it may not be used or cited for precedent. Pursuant to a
power of attorney on file, we are sending a copy of this letter to X’s authorized
representative.

      The rulings contained in this letter are 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 rulings requested, it is subject to verification on
examination.


                                      Sincerely,

                                      Holly Porter
                                      Chief, Branch 3
                                      Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)


Enclosures (2):
      Copy of this letter
      Copy for §6110 purposes