New owner may restore S election before five-year waiting period ends

Plain-English summary

A corporation's sole shareholder had revoked its S election. A new shareholder later bought stock, and the corporation redeemed all of the former owner's remaining shares, leaving the buyer as sole owner. The corporation asked to make a new S election before section 1362(g)'s normal five-year waiting period expired. The IRS concluded that the corporation met its burden for early consent, a result supported by the complete ownership change. It allowed a new S election effective on the requested date if the corporation filed Form 2553 within 120 days.

Ruling snapshot

• Question: May the corporation reelect S status before the five-year post-termination waiting period expires after a complete ownership change?
• Outcome: approved
• Key authorities: IRC § 1362(a), (d), and (g); Treas. Reg. § 1.1362-5(a)

Full text (IRS public release)

Internal Revenue Service                               Department of the Treasury
                                                       Washington, DC 20224

Number: 202009015                                      Third Party Communication: None
Release Date: 2/28/2020                                Date of Communication: Not Applicable
Index Numbers: 1362.00-00, 1362.01-00,
              1362.01-02                               Person To Contact:
                                                       ------------------, ID No. -----------------
-------------------------------                        Telephone Number:
-------------------------------------                  --------------------
--------------------------------                       Refer Reply To:
----------------------------------                     CC:PSI:B03
                                                       PLR-114389-19
                                                       Date:
                                                       December 03, 2019




LEGEND

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

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

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

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

Date 2            =- ----------------------

Date 3            = ---------------------

Date 4            = ----------------------

Date 5            = --------------------------

Date 6            = --------------------------

Date 7            = ----------------------

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

Dear -----------:
PLR-114389-19                                2

This letter responds to a letter dated June 14, 2019, and subsequent correspondence
submitted on behalf of X requesting a ruling under § 1362(g) of the Internal Revenue
Code (Code).

                                         FACTS

X was incorporated in State on Date 1 and made an S corporation election effective
Date 2. On Date 3, A, the sole shareholder of X, revoked X’s S corporation election
effective Date 4. Pursuant to a Stock Purchase Agreement dated Date 5, A sold shares
in X to B and the shares were transferred to B on Date 6. On Date 7, X redeemed all of
A’s remaining shares, leaving B as the sole shareholder. X is requesting permission to
reelect to be an S corporation effective Date 7, prior to the expiration of the five-year
waiting period imposed by § 1362(g).

                                 LAW AND ANALYSIS

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

Section 1362(g) provides that if a small business corporation has made an election
under § 1362(a) and if such election has been terminated under § 1362(d), the
corporation (and any successor corporation) is not eligible to make an election under
§ 1362(a) for any taxable year before its fifth taxable year which begins after its first
taxable year for which the termination is effective, unless the Secretary consents to the
election.

Section 1.1362-5(a) of the Income Tax Regulations provides that the corporation has
the burden of establishing that under the relevant facts and circumstances, the
Commissioner should consent to a new election. The fact that more than 50 percent of
the stock in the corporation is owned by persons who did not own any stock in the
corporation on the date of the termination tends to establish that consent should be
granted. In the absence of this fact, consent ordinarily is denied unless the corporation
shows that the event causing termination was not reasonably within the control of the
corporation or shareholders having a substantial interest in the corporation and was not
part of a plan on the part of the corporation or of such shareholders to terminate the
election.

                                     CONCLUSION

Based solely on the facts submitted and representations made, we conclude that X has
met its burden under § 1.1362-5(a). We grant permission for X to reelect to be an S
corporation effective Date 7. Accordingly, provided that X makes an election to be an S
corporation by filing a completed Form 2553, Election by a Small Business Corporation,
with the appropriate service center effective Date 7, within 120 days following the date
PLR-114389-19                                 3

of this letter, then such election will be treated as timely made for X’s taxable year
beginning Date 7. A copy of this letter should be attached to the Form 2553.

Except for the specific ruling above, we express or imply no opinion concerning the
federal income tax consequences of the facts of this case under any other provision of
the Code including whether X was or is a small business corporation under § 1361(b).

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.

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.

In accordance with a power of attorney on file with this office, we are sending a copy of
this letter ruling to your authorized representatives.

                                              Sincerely,


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



Enclosures: Copy of this letter
            Copy of this letter for § 6110 purposes


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