Late S-corporation election excused for reasonable cause under § 1362(b)(5)

Plain-English summary

A corporation with a single shareholder intended to be taxed as an S corporation from the day it was formed and had been filing its returns that way, but it never timely filed Form 2553, the election that actually makes a company an S corporation. The taxpayer asked the IRS to treat the election as timely under Internal Revenue Code § 1362(b)(5), which lets the IRS forgive a late S-corporation election when there was reasonable cause for the delay. The IRS found reasonable cause and ruled the election will be treated as timely made for the tax year the company intended, so long as the company files a proper Form 2553 within 120 days. This is a routine but valuable fix: without it, the corporation could have been taxed as a regular C corporation (with entity-level tax) for years it believed it was an S corporation. The IRS took no position on whether the company otherwise qualifies as an S corporation.

Ruling snapshot

• Question: Was there reasonable cause to treat the corporation's late S-election as timely made under § 1362(b)(5)?
• Outcome: Approved (election treated as timely, contingent on filing Form 2553 within 120 days)
• Key authorities: IRC §§ 1361(a), 1362(a), 1362(b), 1362(b)(5)

Full text (IRS public release)

Internal Revenue Service                     Department of the Treasury
                                             Washington, DC 20224

Number: 201845021                     Third Party Communication: None
Release Date: 11/9/2018               Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.01-03,
              9100.00-00              Person To Contact:
                                      --------------------, ID No. ------------------
-------------------------------------------        Telephone Number:
-----------------                     --------------------
---------------------                 Refer Reply To:
--------------------------------      CC:PSI:01
                                      PLR-107978-18
                                      Date:
                                      July 23, 2018


                                    LEGEND

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

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

Date      = --------------------

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


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

This letter responds to your request dated February 12, 2018, and subsequent
correspondence submitted on behalf of X, requesting a ruling under § 1362(b)(5) of the
Internal Revenue Code (Code).

                                    FACTS

X was incorporated under the laws of State on Date. The sole shareholder of X is A. It
is represented that X intended to be an S corporation effective Date. Since Date, X has
filed tax returns consistent with S corporation treatment.

However, X's Form 2553, Election by a Small Business Corporation, was not timely
filed. X requests a ruling under § 1362(b)(5) that its § 1362(a) election will be treated as
timely made for its tax year that began on Date.

                              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 1362(a) generally provides that a small business corporation may elect to be an
S corporation.

Section 1362(b) provides when an S corporation election will be effective. Generally, if
an S corporation election is made within the first two and one half months of a
corporation's taxable year, then that corporation will be treated as an S corporation
beginning the year in which the election is made.

Section 1362(b)(3) provides that if an S corporation election is made after the first two
and one half months of a corporation's taxable year, then that corporation will not be
treated as an S corporation until the taxable year after the year in which the S election is
made.

Section 1362(b)(5) provides that if (1) an election under § 1362(a) is made for any
taxable year after the date prescribed by § 1362 for making the election or no § 1362(a)
election is made for any taxable year; and (2) the Secretary determines that there was
reasonable cause for the failure to timely make the election, then the Secretary may
treat the election as timely made for such taxable year

                                 CONCLUSIONS

Based upon the facts submitted and representations made, we conclude that X has
established reasonable cause for not making a timely election and is eligible for relief
under § 1362(b)(5). Accordingly, X's S corporation election will be treated as timely
made for its taxable year that began on Date.

This ruling is contingent on X filing Form 2553, Election by a Small Business
Corporation, with an effective date of Date, with the appropriate Service Center within
120 days from the date of this ruling. A copy of this letter should be attached to the
Form 2553 filed with the Service Center.

Except as specifically set forth 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 concerning whether X otherwise
qualifies as an S corporation for federal tax purposes.

This rule is directed only to the taxpayer who requested it. According to § 6110(k)(3) of
the Code, this ruling may not be used or cited as precedent.

This 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 the support of the ruling request, it is subject to verification on examination.



                                        Sincerely,

                                        Associate Chief Counsel
                                        (Passthroughs & Special Industries)


                                        Wendy L. Kribell

                                  By:
                                        Wendy L. Kribell
                                        Assistant to the Branch Chief, Branch 1
                                        (Passthroughs & Special Industries)

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


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