Corporation receives relief for rejected S election

Plain-English summary

A domestic corporation intended to elect S corporation status, but the IRS rejected its initial election and the corporation did not learn of the rejection until later. Its shareholders had filed returns consistently with S corporation treatment, and the corporation represented that the failure was inadvertent rather than tax-motivated. The IRS concluded that any ineffectiveness of the election was inadvertent under IRC § 1362(f). It allowed S corporation treatment from the intended effective date, conditioned on filing a corrected Form 2553 within 120 days and remaining otherwise eligible.

Ruling snapshot

• Question: Should the corporation be treated as an S corporation despite the rejected initial election?
• Outcome: Approved
• Key authorities: IRC §§ 1361, 1362(a), 1362(f); Treas. Reg. § 1.1362-6

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201549019 Third Party Communication: None
Release Date: 12/4/2015 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
------------------------- ---------------------------, ID No. ---------------
------------------------------------------------------------ -----------------
---------------------------------- Telephone Number:
-------------------------------- ----------------------
------------------------------ Refer Reply To:
CC:PSI:B03
PLR-110851-15
Date:
August 03, 2015

Legend

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

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

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

Year 1 = -------

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

   This letter responds to a letter dated January 29, 2015, and subsequent

correspondence, submitted on behalf of X by X's authorized representative, requesting
a ruling under § 1362(f) of the Internal Revenue Code (the Code).

                                                 FACTS

  The information submitted states that X is a domestic corporation that elected to

be an S corporation effective D1. This initial election was rejected by the Service, but X
was unaware of the rejection until D2.

  X represents that its shareholders have filed tax returns consistent with X being

an S corporation for Year 1. X further represents that the circumstances resulting in the
termination of X's S corporation election were inadvertent and were not motivated by tax
avoidance or retroactive tax planning. X and its shareholders have agreed to make
PLR-110851-15 2

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 the year. Section 1361(b)(1) defines a “small business corporation” as a
domestic corporation which is not an ineligible corporation and which 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(a)(2) provides that an election under this section 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 1.1362-6(a)(2) provides that a small business corporation makes an

election under section 1362(a) to be an S corporation by filing a completed Form 2553.
The election form must be filed with the service center designated in the instructions
applicable to Form 2553. The election is not valid unless all shareholders of the
corporation at the time of the election consent to the election in the manner provided in
paragraph (b) of this section. However, once a valid election is made, new shareholders
need not consent to that election.

  Section 1.1362-6(a)(2)(ii)(C) provides, in relevant part, that the taxable year of a

new corporation begins on the date that the corporation has shareholders, acquires
assets, or begins doing business, whichever is the first to occur. The existence of
incorporators does not necessarily begin the taxable year of a new corporation.

   Section 1.1362-6(b)(1) provides, in relevant part, that a shareholder's consent

required under paragraph (a) of this section must be in the form of a written statement
that sets forth the name, address, and taxpayer identification number of the
shareholder, the number of shares of stock owned by the shareholder, the date (or
dates) on which the stock was acquired, the date on which the shareholder's taxable
year ends, the name of the S corporation, the corporation's taxpayer identification
number, and the election to which the shareholder consents. The statement must be
signed by the shareholder under penalties of perjury. The election is not valid if any
required consent is not filed in accordance with the rules contained in this paragraph
(b). The consent statement should be attached to the corporation's election statement.
PLR-110851-15 3

    Section 1362(f) provides, in part, that if (1) an election under § 1362(a) by any

corporation was not effective for the taxable year for which made by reason of a failure
to meet the requirements of § 1361(b), (2) the Secretary determines that the
circumstances resulting in the ineffectiveness were inadvertent, (3) no later than a
reasonable period of time after the discovery of the circumstances resulting in the
ineffectiveness, steps were taken so that the corporation for which the election was
made is a small business corporation, and (4) the corporation for which the election was
made, and each person who was a shareholder in such corporation at any time during
the period specified by § 1362(f), 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 ineffectiveness, the corporation is treated as an S corporation during the period
specified by the Secretary.

                                   CONCLUSION

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

that X's S corporation election may have been ineffective. We further conclude that, if
the election was ineffective, the ineffectiveness was inadvertent within the meaning of
§ 1362(f). Therefore, X will be treated as an S corporation effective D1 and thereafter,
provided X's S corporation election is not otherwise terminated under § 1362(d).

   This ruling is contingent on X filing a corrected Form 2553, Election by a Small

Business Corporation, with the appropriate service center, within 120 days from the
date of this letter, effective D1. A copy of this letter should be attached to the election.

   Except as expressly provided herein, we express or imply no opinion concerning

the federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, we express or imply no opinion regarding whether
X is otherwise eligible to be treated as an 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 as precedent.

   Pursuant to a power of attorney on file, we are sending a copy of this letter to X's

authorized representatives.
PLR-110851-15 4

   The ruling contained in this letter is 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 ruling request, it is subject to verification on examination.

                                            Sincerely,




                                            Richard T. Probst
                                            Senior Technician Reviewer, Branch 3
                                            Office of the Associate Chief Counsel
                                            (Passthroughs & Special Industries)

Enclosures (2):

Copy of this letter
Copy for § 6110 purposes