Corporation receives inadvertent S election termination relief

Plain-English summary

An S corporation transferred shares to an individual who was a resident alien at the time. The shareholder later became a nonresident alien, making the shareholder ineligible and terminating the corporation's S status. After discovering the problem, the corporation and its shareholders redeemed the individual's stock, leaving only eligible S corporation shareholders. They had continued filing federal returns consistently with S corporation treatment and represented that the termination was inadvertent, not tax-motivated, and that they would make any required adjustments. The IRS granted relief under section 1362(f) and treated the corporation as an S corporation throughout the termination period and afterward, provided its election was otherwise valid. The IRS did not determine whether the corporation satisfied every other S corporation requirement.

Ruling snapshot

• Question: Would the corporation retain S status after an existing shareholder became a nonresident alien and the corporation later redeemed that shareholder's stock?
• Outcome: Approved as an inadvertent termination
• Key authorities: IRC §§ 1361(b)(1), 1362(d)(2), and 1362(f)

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202343022                                              Third Party Communication: None
 Release Date: 10/27/2023                                       Date of Communication: Not Applicable
 Index Number: 1361.00-00, 1361.01-03,
               1362.00-00, 1362.02-00,                          Person To Contact:
               1362.02-02, 1362.04-00                           --------------------------, ID No. ----------------
                                                                -----------------
 --------------------------                                     Telephone Number:
 ------------------------------------------------------------   --------------------
 ---------                                                      Refer Reply To:
 ----------------------------                                   CC:PSI:B01
 ----------------------------------                             PLR-102199-23
 ------------------------------                                 Date:
                                                                July 31, 2023




LEGEND

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

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

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

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

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




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

This responds to a letter dated January 20, 2023, and supplemental information,
submitted on behalf of X by X's authorized representative, requesting relief under
section 1362(f) of the Internal Revenue Code (the Code).

FACTS

According to the information submitted and representations made within, X was formed
under the laws of State and made an S election effective Date 1. On Date 2, shares in

PLR-102199-23                                2

X were transferred to A, a resident alien. On Date 3, A had a change in residence and
was thereafter a nonresident alien. On Date 4, X and its shareholders took remedial
action by engaging in a redemption of A’s stock in X. As of Date 4, X represents that all
of its shareholders are eligible S corporation shareholders.

X also represents that X and its shareholders have filed federal income tax returns
consistent with X’s treatment as an S corporation. In addition, X represents that the
termination of its S corporation status was inadvertent and was not motivated by tax
avoidance or retroactive tax planning. Further, X represents that X and its shareholders
agree to make any adjustments required as a condition of obtaining relief for the
termination of X’s election as provided under § 1362(f) of the Code that may be required
by the Secretary.

LAW AND ANALYSIS

Section 1361(a)(1) of the Code 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
which is not an ineligible corporation and which 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 1
class of stock.

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated
whenever the corporation ceases to be a small business corporation. A termination of
an S corporation under § 1362(d)(2) is effective on and after the date of cessation.

Section 1362(f) provides, in relevant part, that if (1) an election under § 1362(a) by any
corporation 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
was terminated under § 1362(d)(2) or (3); (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 termination occurred is a small business corporation; and (4)
the corporation for which the election was made or termination occurred, and each
person who was a shareholder in such corporation at any time during the period
specified pursuant to § 1362(f), agrees to make the adjustments (consistent with the
treatment of such corporation as an S corporation) as may be required by the Secretary
with respect to such period, then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such corporation shall be treated as an S corporation
during the period specified by the Secretary.

PLR-102199-23                                 3


CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that X's
S corporation status inadvertently terminated within the meaning of § 1362(f) on Date 3
because A was an ineligible shareholder. Pursuant to the provisions of § 1362(f), X will
be treated as an S corporation from Date 3 and thereafter, provided X's S corporation
election is otherwise effective and not terminated under § 1362(d).

Except as specifically ruled upon 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. Specifically, we express or imply no opinion regarding X's eligibility to be an S
corporation.

This ruling is directed only to the taxpayer who requested it. According to § 6110(k)(3),
this ruling 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 your authorized representative.


                                      Sincerely,


                                                               /s/
                                      Joy C. Spies
                                      Senior Technician Reviewer, Branch 1
                                      Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)
Enclosure
      Copy for § 6110 purposes



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