IRS grants reasonable-cause relief for a company that filed as an S corporation for years but never actually filed the S election

Plain-English summary

To be taxed as an S corporation, a company must file Form 2553 within a set window. Here an LLC's members decided to be taxed as an S corporation and relied on their tax adviser to file the election, but the adviser never did, even though the company filed S corporation returns (Form 1120S) as if the election were in place. When the members discovered the IRS had no returns on file, new advisers filed the election. The company asked the IRS to treat the S election as timely under § 1362(b)(5), which allows late relief when there was reasonable cause for the failure. The IRS agreed there was reasonable cause and ruled the election will be treated as timely if the company files a completed Form 2553 (with the intended effective date) within 120 days of the letter, so long as the company and its members keep filing consistently as an S corporation. The IRS expressed no opinion on whether the company otherwise qualifies as an S corporation. This is the standard cure for an S election that everyone assumed was made but never was.

Ruling snapshot

• Question: Was there reasonable cause under § 1362(b)(5) to treat a never-filed S corporation election as timely made?
• Outcome: approved (election treated as timely if Form 2553 is filed within 120 days)
• Key authorities: IRC §§ 1362(a), (b)(3), (b)(5)

Full text (IRS public release)

 Internal Revenue Service                                  Department of the Treasury
                                                           Washington, DC 20224

 Number: 202049003                                         Third Party Communication: None
 Release Date: 12/4/2020                                   Date of Communication: Not Applicable
 Index Number: 1362.00-00, 1362.01-00,
               1362.01-03                                  Person To Contact:
                                                           -----------------------, ID No. -------------
 -----------------------------------------                 Telephone Number:
 -----------------------------------------                 --------------------
 -------------------------                                 Refer Reply To:
 -------------------------------                           CC:PSI:B03
                                                           PLR-112886-20
                                                           Date:
                                                           July 30, 2020




LEGEND

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

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

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

 C           = ------------------------
               -------------------------

 State       = --------

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

 Year 1      = -------

 Year 2      = -------


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

       This letter responds to a letter dated May 27, 2020, on behalf of X, requesting a
ruling under § 1362(b)(5) of the Internal Revenue Code.
PLR-112886-20                                 2

                                          FACTS

        According to the information submitted, X is a limited liability company, formed
under State law on Date. X’s members, A, B, and C, also decided to make an election
to treat X as an S corporation effective Date. The members relied on X's tax adviser to
file X's Form 2553, Election by a Small Business Corporation, beginning Date.
However, the Form was never filed. X filed Form 1120S, U.S. Income Tax Return for an
S corporation consistent with its intended S corporation election for taxable beginning
with Date through Year 2. When X’s members learned that the Internal Revenue
Service did not have any tax returns on file for X, X and X's members engaged new tax
advisors to file a Form 2553, Election by a Small Business Corporation effective Date.
The new tax advisors filed the election under Rev. Proc. 2013-30 requesting X’s S
election take effect retroactively, from Date through Year 2. X received relief from Year
1 to Year 2.

       X requests a ruling under § 1362(b)(5), that its S corporation election will be
treated as timely made beginning on Date.

                                  LAW AND ANALYSIS

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

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

      Section 1362(b)(3) provides that if an S election is made after the first two and
one-half months of a corporation's taxable year, then the 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 and § 1362(b)(3)
shall not apply.
PLR-112886-20                                 3

                                      CONCLUSION

         Based on the facts submitted and representations made, we conclude that X has
established reasonable cause for failing to make a timely S election for its taxable year
that began on Date and that X is eligible for relief under § 1362(b)(5). Accordingly, if X
makes an election to be an S corporation by filing with the appropriate Service Center a
completed Form 2553, containing an effective date of Date for the election, within 120
days following the date of this letter, then such election will be treated as timely made.
A copy of this letter should be attached to the Form 2553 filed with the Service Center.
Furthermore, this ruling is contingent on X and its shareholders, A, B, and C, continuing
to file federal income tax returns consistent with the treatment of X as an S corporation.

       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 concerning
whether X is an S corporation for federal tax purposes.

        Pursuant to a power of attorney on file with this office, we are sending a copy of
this letter to X's authorized representatives.

       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.

        In accordance with the Power of Attorney on file with this office, copies of this
letter ruling will be sent to your authorized representatives.


                                       Sincerely,




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


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


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