Late S corporation year-splitting election allowed

Plain-English summary

Two shareholders transferred a substantial portion of an S corporation's stock to two trusts during the corporation's tax year. The corporation intended to elect under Treas. Reg. § 1.1368-1(g)(2) to divide that year into two separate taxable years at the transfer date, but it did not file the election on time. That election changes how income, losses, accumulated adjustments, earnings and profits, basis, and distributions are allocated around a qualifying stock disposition. The IRS found that the regulatory-election relief requirements were satisfied and granted 120 days from the ruling date to file the election. The written election must be filed with the appropriate service center and associated with the corporation's return for the affected year.

Ruling snapshot

• Question: Could the S corporation make a late election to split its tax year at a qualifying stock disposition?
• Outcome: Approved, with 120 days to file
• Key authorities: IRC §§ 1368, 1377; Treas. Reg. §§ 1.1368-1(g), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202345005                                             Third Party Communication: None
Release Date: 11/10/2023                                      Date of Communication: Not Applicable
Index Number: 1368.00-00, 9100.00-00
                                                              Person To Contact:
---------------------------------                             ------------------------, ID No. -----------------
---------------------------                                   Telephone Number:
-------------------                                           --------------------
--------------------------------------                        Refer Reply To:
 ------------------------------------------------------------ CC:PSI:01
                                                              PLR-103267-23
                                                              Date:
                                                              August 14, 2023




                                                  LEGEND

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

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

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

Trust 1       =    ----------------------------------------------------------------------------------------------
                   ----------------------

Trust 2       =    ----------------------------------------------------------------------------------------------
                   ----------------------

n             =    ---

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

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

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

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

Year          =    -------

PLR-103267-23                                 2


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

This letter responds to a letter dated December 19, 2022, submitted on behalf of X by
its authorized representatives, requesting an extension of time under § 301.9100-3 of
the Procedure and Administration Regulations to file an election under § 1.1368-1(g)(2)
of the Internal Revenue Code (“Code”).

                                          FACTS

The information submitted states that X was organized as a corporation under the laws
of State on Date 1. Effective Date 2, X elected to become an S corporation for U.S.
federal income tax purposes.

On Date 3, A and B transferred a total of n% of X’s stock to Trust 1 and Trust 2. X
represents that it intended to make a § 1.1368-1(g)(2) election for its Year taxable year.
However, X inadvertently failed to timely file a § 1.1368-1(g)(2) election to treat its Year
taxable year as if it had two separate taxable years based on the Date 3 stock transfers.

                                   LAW AND ANALYSIS

Section 1377(a)(1) of the Code provides, in general, that each S corporation
shareholder's pro rata share of any item for any taxable year is the sum of the amounts
determined for the shareholder by assigning an equal portion of the item to each day of
the tax year and then dividing that portion pro rata among the shares outstanding on
that day.

Section 1.1368-1(g)(1) of the Procedure and Administration Regulations provides that
an S corporation that undertakes a "qualifying disposition" of stock may make an
election under Section 1.1368-1(g)(2) to divide a taxable year into two separate taxable
years, with the first taxable year ending at the close of the day on which the qualifying
disposition takes place.

Section 1.1368-1(g)(2)(i)(A) provides that a "qualifying disposition" includes "a
disposition by a shareholder of 20 percent or more of the outstanding stock of the
corporation in one or more transactions during any thirty-day period during the
corporation's taxable year.

Section 1.1368-1(g)(2)(ii) provides that an S corporation that makes the election under
§ 1.1368-1(g)(2)(i) must treat the taxable year as separate taxable years for purposes of
allocating items of income and loss; making adjustments to the AAA, earnings and
profits, and basis; and determining the tax effect of distributions under § 1368(b) and
(c).

PLR-103267-23                                3

Section 1.1368-1(g)(2)(iii) provides that an S corporation makes the election under
Section 1.1368-1(g)(2)(i) by attaching a written statement to its timely filed (including
extensions) original or amended U.S. federal income tax return for a taxable year
(without regard to the election under § 1.1368-1(g)(2)(i)). The written statement must:
(1) state that the S corporation is electing for the taxable year under § 1.1368-1(g)(2)(i)
to treat the taxable year as if it consisted of separate taxable years; (2) set forth facts
relating to the qualifying disposition; and (3) state that each shareholder who held stock
in the corporation during the taxable year (without regard to the election under § 1.1368-
1(g)(2)(i)) consents to the election.

Section 301.9100-1(c) provides that the Commissioner may grant a reasonable
extension of time to make a regulatory election, or a statutory election (but no more than
6 months except in the case of a taxpayer who is abroad), under all subtitles of the
Code except subtitles E, G, H, and I. Section 301.9100-1(b) provides that the term
“regulatory election” includes an election whose due date is prescribed by a regulation
published in the Federal Register.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make an election. Section
301.9100-2 provides the rules governing automatic extensions of time for making
certain elections. Section 301.9100-3 provides the standards the Commissioner will
use to determine whether to grant an extension of time for regulatory elections that do
not meet the requirements of § 301.9100-2.

Under § 301.9100-3, a request for relief will be granted when the taxpayer provides
evidence (including affidavits described in § 301.9100-3(e)) to establish to the
satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good
faith, and (2) the grant of relief will not prejudice the interests of the Government.

                                     CONCLUSION

Based solely on the information submitted and the representations made, we conclude
that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. As a
result, X is granted an extension of time of 120 days from the date of this letter to make
an election under § 1.1368-1(g)(2)(i) effective for its Year taxable year. The election
should be made in a written statement filed with the appropriate service center to be
associated with X's Year tax return. A copy of this letter should be attached to the
relevant filing.

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.

PLR-103267-23                                  4

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

The rulings contained in this letter are 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 request for rulings, it is subject to verification on examination.

This ruling is directed only to the taxpayer requesting 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, a copy of this letter is
being sent to your authorized representative.



                                                    Sincerely,

                                                    Associate Chief Counsel
                                                    (Passthroughs & Special Industries)



                                              By:
                                                    Joy C. Spies
                                                    Senior Technician Reviewer, Branch 1
                                                    Office of the Associate Chief Counsel
                                                    (Passthroughs & Special Industries)




Enclosure
Copy for § 6110 purposes

PLR-103267-23                                           5


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