Consent to re-elect S corporation status before the five-year waiting period

Plain-English summary

A corporation's S corporation election ended when its shares were transferred to an ineligible shareholder, which automatically terminated the S election under section 1362(d). Normally, once an S election is terminated, the corporation cannot elect S status again for five years unless the IRS consents (section 1362(g)). After a further sale, a new owner (an individual holding the company through disregarded entities) became the sole shareholder and wanted to restore S status early. Under Treas. Reg. § 1.1362-5(a), consent is favored when more than 50 percent of the stock is now held by people who did not own it when the election terminated, which was the case here. The IRS granted consent and gave the company 120 days to file a new Form 2553 to be an S corporation effective the requested date. The IRS expressed no opinion on whether the company otherwise qualifies as a small business corporation.

Ruling snapshot

• Question: Will the IRS consent, under section 1362(g), to a new S corporation election before the usual five-year waiting period runs?
• Outcome: approved
• Key authorities: IRC § 1362(g) (and § 1362(d)); Treas. Reg. § 1.1362-5(a)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202229031                                             Third Party Communication: None
Release Date: 7/22/2022                                       Date of Communication: Not Applicable
Index Number: 1362.01-02
                                                              Person To Contact:
---------------------------                                   ------------, ID No. -----------------
--------------------------------------                        Telephone Number:
----------------------------------                            --------------------
-------------------------                                     Refer Reply To:
-----------------------------------                           CC:PSI:B03
                                                              PLR-123698-21
                                                              Date:
                                                              April 26, 2022




LEGEND

Company             = -----------------------------------------------------------------------------------------
                      -----------------------

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

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

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

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

D                   = -----------------------------

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

Y                   = ---------------------------------------

Z                   = -------------------------------------

Agreement           = -----------------------------------------------------------------------------------------
                      ------------------------------------------------

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

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

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

Date 4              = --------------------------
PLR-123698-21                                   2


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



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

       This letter responds to a letter dated November 1, 2021, submitted on behalf of
Company by its authorized representative, requesting a ruling under § 1362(g) of the
Internal Revenue Code (Code).

                                              FACTS

        Company, a State corporation, elected to be an S corporation effective Date 1.
Prior to Agreement, individuals, A, B, and C owned all of the shares of Company stock.
Pursuant to Agreement, B and C transferred their shares of Company stock to A who
then on Date 2 transferred all of the shares of Company stock to X, an ineligible S
corporation shareholder, terminating Company’s S corporation election under § 1362(d).
Subsequently, pursuant to Agreement, Y, indirectly owned in part by D, an individual,
through Z, a partnership, purchased all of the shares of Company stock on Date 3 from
X.

        Prior to Date 4, through a series of steps, D, through two wholly-owned entities
treated as disregarded entities for federal tax purposes under § 301.7701-3 of the
Procedure and Administration Regulations, became the sole shareholder of Company.
Company is requesting permission to reelect to be an S corporation effective Date 5,
prior to the to the five-year waiting period imposed by § 1362(g).

                                              LAW

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

      Section 1362(d)(2) provides that an election under § 1362(a) is terminated
whenever (at any time on or after the first day of the first taxable year for which the
corporation is an S corporation) such corporation ceases to be a small business
corporation. Any termination under § 1362(d)(2)(A) is effective on and after the date of
cessation.

       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.
PLR-123698-21                                 3


        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.
                                      CONCLUSIONS

       Based on the information submitted and the representations made, we conclude
that Company has met its burden under § 1.1362-5(a) and we grant permission for
Company to reelect to be an S corporation effective Date 5. Accordingly, provided that
Company 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 5, within 120 days from the date of this letter, then such election will be treated as
timely made for Company’s taxable year beginning Date 5. 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 tax consequences of the facts of this case under any other provision of the
Code including whether Company 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.
PLR-123698-21                               4

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

                                     Sincerely,

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


Enclosure:
      Copy of letter for § 6110 purposes




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