State-law formation error received late S corporation election relief

Plain-English summary

An owner attempted to form a corporation and filed Form 2553, but the entity had not been properly formed under state law, making the S election invalid. The corporation was later formed correctly, and it and the owner filed returns as though S status had applied from that date. The entity later converted to a limited liability company in a transaction represented as an F reorganization. The IRS found reasonable cause for the missing valid election and recognized the successor as an S corporation from the proper formation date. Relief required a completed Form 2553 within 60 days and did not decide whether the entity otherwise qualified for S status.

Ruling snapshot

• Question: Could the successor entity receive S corporation status from the date its predecessor was properly formed?
• Outcome: Approved, conditioned on filing Form 2553 within 60 days.
• Key authorities: IRC §§ 1361, 1362(a), (b)(5), 368(a)(1)(F)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201743001                                              Third Party Communication: None
Release Date: 10/27/2017                                       Date of Communication: Not Applicable
Index Number: 1362.04-00
                                                               Person To Contact:
----------------------------------------------------------     ---------------------, ID No. ------------------
-------------------------------------------                    Telephone Number:
-----------------------------------------------                ----------------------
 ----------------------------                                  Refer Reply To:
                                                               CC:PSI:B01
                                                               PLR-102464-17
                                                               Date:
                                                               July 17, 2017




LEGEND


X        =         ------------------------------------------------------------
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Y        =         ----------------------------------------------------------------------
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State =           --------------

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

B        =         -------------------------------------------------
----------------------------------

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

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

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

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

D5       =        ------------------------

D6       =        ----------------------

D7       =        ---------------------
PLR-102464-17                                 2



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

       This letter responds to a letter, dated January 10, 2017, and subsequent
correspondence, written on behalf of X from X’s authorized representative, requesting a
ruling under §1362(b)(5) of the Internal Revenue Code.

FACTS

        According to the information submitted, X is the state-law successor to Y, which
was formed under the laws of State on D4. On D1, A, the person who would have been
the then-sole shareholder of Y if Y had been properly formed, attempted to form Y. In
D2, A filed a Form 2553, Election by a Small Business Corporation, for Y effective D3.
But A did not properly form Y on D1. Thus, the S corporation election was invalid. On
D4, A properly formed Y. On D5, Y was advised by its accountant that Y’s S
corporation election was ineffective. On D6, A transferred a portion of A’s 100% interest
in X to a trust, B, that X represents was and is an eligible shareholder of an
S corporation. On D7, Y converted under State state law to a limited liability company,
X, in a transaction that, X represents, qualified as a reorganization under § 368(a)(1)(F).

       X represents that Y and A filed their tax returns as if Y were an S corporation.
This includes allocating Y’s items of income, loss, deduction, and credit to A.

        X requests a ruling that it will be recognized as an S corporation effective D4.

LAW AND ANALYSIS

        Section 1361(a) 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, in part, that the term “small business corporation”
means a domestic corporation which is not an ineligible corporation and which does not
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(b)(1) provides that an election under § 1362(a) may be made by a
small business corporation for any taxable year at any time during the preceding taxable
PLR-102464-17                                3

year, or at any time during the taxable year and on or before the 15th day of the third
month of the taxable year.

       Section 1362(b)(3) provides that if (A) a small business corporation makes an
election under § 1362(a) for any taxable year, and (B) such election is made after the
15th day of the third month of the taxable year and on or before the 15th day of the third
month of the following taxable year, then such election shall be treated as made for the
following taxable year.

        Section 1362(b)(5) provides that if (A) an election under § 1362(a) is made for
any taxable year (determined without regard to § 1362(b)(3)), after the date prescribed
by § 1362(b) for making the election for the taxable year or no such 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, the Secretary may treat the election as timely
made for the taxable year (and § 1362(b)(3) shall not apply).

        X did not file a timely election to be treated as an S corporation under § 1362(a)
effective D4. X has, however, established reasonable cause for not making a timely
election and is entitled to relief under § 1362(b)(5).

CONCLUSION

              Based solely on the facts submitted and representations made, and
provided that X otherwise qualifies as a subchapter S corporation, we conclude that X
will be recognized as an S corporation effective D4. Within 60 days from the date of this
letter, X must submit a properly completed Form 2553, with a copy of this letter
attached, to the appropriate service center.

       Except as specifically set forth above, we express or imply no opinion concerning
the federal tax consequences of any aspect of any transaction or item described above
under any other provision of the Code. Specifically, we express or imply no opinion
regarding whether Y or its successor 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.
PLR-102464-17                                 4


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


                                       Sincerely,


                                       David R. Haglund

                                       David R. Haglund
                                       Chief, Branch 1
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)

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



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