Corporation receives relief for late S election

Plain-English summary

A corporation intended to be an S corporation from its formation date but inadvertently failed to file Form 2553 on time. Its original shareholder later transferred shares to two trusts whose beneficiaries timely elected qualified subchapter S trust treatment. The corporation had filed its returns consistently with S corporation status. The IRS found reasonable cause and granted late-election relief under Section 1362(b)(5). The corporation had 120 days to file Form 2553 and attach the ruling and previously filed trust elections, but the IRS did not rule on whether it otherwise qualified as an S corporation.

Ruling snapshot

• Question: Could the corporation's late S election be treated as timely from its formation date?
• Outcome: Approved; the corporation received 120 days to file Form 2553 effective from the intended date.
• Key authorities: IRC §§ 1361(d)(3) and 1362(a), (b)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201822006 Third Party Communication: None
Release Date: 6/1/2018 Date of Communication: Not Applicable
Person To Contact:
Index Number: 1362.01-03 ---------------------------, ID No. ----------------
-----------------
Telephone Number:
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----------------------------------------------------------- Refer Reply To:
-------------------------------- CC:PSI:B03
----------------------------------- PLR-127437-17
Date:
March 05, 2018

     LEGEND

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

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

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

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

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

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

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

     Trust 1 = -------------------------------------------
     --------------------------------------
     -------------------------------------------
     -------------------------------------

     Trust 2 = -------------------------------------------
     --------------------------------------
     --------------------------------------
     -------------------------------------

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

   This letter responds to a letter dated September 1, 2017, submitted on behalf of

X by its authorized representative requesting a ruling under § 1362(b)(5) of the Internal
Revenue Code (the Code).

                                      FACTS

   The information submitted states that X was organized on D1 as a corporation

under the laws of State. Originally, A owned all of the shares of X. A intended for X to
be an S corporation effective D1, but X inadvertently failed to timely file a Form 2553,
Election by a Small Business Corporation.

    On D2, A transferred shares of stock in X to Trust 1 and to Trust 2. X represents

that Trust 1 and Trust 2 each met the qualified subchapter S trust (QSST) requirements
set forth in § 1361(d)(3) as of D2 and thereafter. On D3, the income beneficiaries of
Trust 1 and Trust 2 each timely filed an election for their respective trust to be treated as
a QSST effective D2. Subsequently, in D4, X received a notice from the Internal
Revenue Service indicating that X had not made an election to be an S corporation. X
then submitted a letter requesting relief under § 1362(b)(5).

   X represents that X and A intended for X to be an S corporation effective D1 and

that X has filed all returns consistent with X’s status as an S corporation since D1.

                              LAW AND ANALYSIS

  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 (A) at any time during the preceding
taxable year, or (B) 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) the 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 such election for such 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, the Secretary may treat such an
election as timely made for the taxable year (and § 1362(b)(3) shall not apply).

                                 CONCLUSION

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

X has established reasonable cause for failing to make a timely election to be an S
corporation effective D1. Thus, we conclude that X is eligible for relief under
§ 1362(b)(5). Accordingly, if X makes an election to be an S corporation by filing a
completed Form 2553 with the appropriate service center effective D1, within 120 days
from the date of this letter, then such election will be treated as timely made. A copy of
this letter and the previously filed QSST elections for Trust 1 and Trust 2 should be
attached to X’s Form 2553.

     Except as specifically ruled upon above, we express or imply no opinion

concerning the federal tax consequences of the facts described above under any other
provision of the Code. Specifically, we express or imply no opinion regarding X’s
eligibility to be an S corporation.

  The ruling contained in this letter is based upon information and representations

submitted by the taxpayer and is 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 this request, it is subject to verification on examination.

  This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of

the Code provides that this ruling may not be used or cited as precedent.

    Pursuant to a power of attorney on file with this office, we are sending a copy of

this letter to your authorized representatives.

                                          Sincerely,



                                          Mary Beth Carchia
                                          Senior Technician Reviewer, Branch 3
                                          Office of Associate Chief Counsel
                                          (Passthroughs and Special Industries)

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