Inadvertent-defect relief for an S corporation election that was invalid because the sole shareholder never signed the consent

Plain-English summary

A limited liability company elected to be taxed as an S corporation, but the election was defective: the company's sole shareholder never signed the consent statement on Form 2553, and an S election is only valid if every shareholder consents. The company later discovered the problem and asked the IRS for relief under section 1362(f), which lets the IRS forgive an election defect it finds was inadvertent. The company had filed all of its returns as if it were a valid S corporation and agreed to make any corrective adjustments the IRS might require. The IRS concluded the missing consent was inadvertent and ruled that the company will be treated as an S corporation from its intended effective date forward, so long as the election was otherwise valid and has not since terminated. As a condition, the company must submit a completed Form 2553 (with a copy of the ruling) within 120 days. This is the routine cure for a paperwork slip that would otherwise blow up years of S corporation tax treatment.

Ruling snapshot

• Question: Was the failure of the sole shareholder to sign the S election consent an inadvertent defect that section 1362(f) can excuse?
• Outcome: Approved (treated as an S corporation from the intended effective date, subject to filing a completed Form 2553 within 120 days).
• Key authorities: IRC § 1362(f); IRC §§ 1361(a)-(b), 1362(a)(2); Treas. Reg. § 1.1362-6.

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 202209010                                            Third Party Communication: None
Release Date: 3/4/2022                                       Date of Communication: Not Applicable
Index Number: 1362.04-00
                                                             Person To Contact:
-------------------------------------                        ----------------------, I.D. No. -------------
----------------------------------------                     Telephone Number:
-------------------------                                    --------------------
------------------------                                     Refer Reply To:
-----------------------------------------------              CC:PSI:B01
                                                             PLR-114045-21

                                                             Date:
                                                             December 03, 2021


LEGEND:

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

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

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

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

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

Year          = -------


Dear--------------------

This responds to a letter dated May 6, 2021, and subsequent correspondence,
submitted on behalf of X, requesting relief under § 1362(f) of the Internal Revenue Code
(the Code).

                                                   FACTS

The information submitted states that X was organized as a limited liability company
under the laws of State on Date 1. X elected to be an S corporation effective Date 2. In
Year, X learned that A, the sole shareholder of X, failed to sign a statement consenting
to X's S corporation election as specified on the Form 2553, Election by a Small
Business Corporation. Consequently, X's S corporation election was ineffective.
PLR-114045-21                                2

X represents that the circumstances surrounding X's ineffective S corporation election
were inadvertent and unintended. X further represents that X and its shareholder have
filed all returns consistent with X having a valid S corporation election in effect as of
Date 2. X and its shareholder have agreed to make any adjustments that the
Commissioner may require, consistent with treatment of X as an S corporation.

                                  LAW AND ANALYSIS

Section 1361(a)(1) 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) defines a "small business corporation" as a domestic corporation
that is not an ineligible corporation and that does not (A) have more than 100
shareholders, (B) 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, (C) have a nonresident alien as a shareholder, and (D) have more than one
class of stock.

Section 1362(a)(2) provides that an election to be an S corporation shall be valid only if
all persons who are shareholders in such corporation on the day on which such election
is made consent to such election.

Section 1.1362-6(a)(2)(i) of the Income Tax Regulations provides that the election to be
an S corporation is not valid unless all shareholders of the corporation at the time of the
election consent to the election in the manner provided in § 1.1362-6(b).

Section 1362(f) provides that if (1) an election under § 1362(a) or § 1361(b)(3)(B)(ii) by
any corporation (i) was not effective for the taxable year for which made (determined
without regard to § 1362(b)(2)) by reason of a failure to meet the requirements of
§ 1361(b) or to obtain shareholder consents, or (ii) was terminated under § 1362(d)
(2) or (3) or § 1361(b)(3)(C); (2) the Secretary determines that the circumstances
resulting in such ineffectiveness or termination were inadvertent; (3) no later than a
reasonable period of time after discovery of the circumstances resulting in such
ineffectiveness or termination, steps were taken so that the corporation for which the
election was made or the termination occurred is a small business corporation; and (4)
the corporation for which the election was made or the termination occurred, and each
person who was a shareholder of the corporation at any time during the period specified
pursuant to § 1362(f), agree to make the adjustments (consistent with the treatment of
the corporation as an S corporation) as may be required by the Secretary with respect
to this period, then, notwithstanding the circumstances resulting in such ineffectiveness
or termination, the corporation shall be treated as an S corporation during the period
specified by the Secretary.


                                      CONCLUSION
PLR-114045-21                                 3


Based solely on the facts submitted and representations made, we conclude that X's
S corporation election was ineffective on Date 2 because its shareholder failed to
consent to X's S corporation election. We conclude, however, that the ineffectiveness
described in this paragraph was inadvertent within the meaning of § 1362(f). Therefore,
X will be treated as an S corporation effective Date 2 and thereafter, provided that its S
corporation election was otherwise valid and has not terminated under § 1362(d).

As a condition to this ruling, X must submit a fully completed Form 2553 effective Date 2
along with a copy of this letter to the appropriate service center within 120 days from the
date of this letter.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. Specifically, no opinion is expressed or implied concerning the eligibility of X
to be an S corporation.

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

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


                                       Sincerely,


                                       /s/ Laura C. Fields

                                       Laura C. Fields
                                       Chief, Branch 1
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)



Enclosure
Copy for § 6110 purpose


cc: