S corporation received relief after a shareholder became a nonresident alien

Plain-English summary

An S corporation's election terminated when one shareholder became a nonresident alien, who is not an eligible S corporation shareholder. The corporation did not learn of the problem until later. It and its shareholders then took remedial steps so that every shareholder was eligible again. They had continued filing federal returns consistently with S corporation status and represented that the termination was inadvertent, not tax-motivated. The IRS granted relief under Section 1362(f), allowing the corporation to continue being treated as an S corporation from the termination date forward, provided the election was otherwise valid and did not terminate for another reason.

Ruling snapshot

• Question: Could the corporation retain S status after a shareholder temporarily became an ineligible nonresident alien?
• Outcome: approved as inadvertent-termination relief
• Key authorities: IRC §§ 1361(b)(1), 1362(d)(2), 1362(f)

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202419011                                              Third Party Communication: None
 Release Date: 5/10/2024                                        Date of Communication: Not Applicable
 Index Numbers: 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:B3
 ----------------------------                                   PLR-116488-23
 ------------------------------------                           Date:
                                                                February 15, 2024




                                                    LEGEND

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

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

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

 Date 3           =      -----------------------------------------------------------------------
                         -----------------------------------------------------------------------
 Date 4           =      ----------------------

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




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

        This letter responds to a letter dated August 3, 2023, and subsequent
correspondence, submitted on behalf of X by X's authorized representative, requesting
a ruling under § 1362(f) of the Internal Revenue Code (the Code).

PLR-116488-23                                2

                                         FACTS

        According to the information submitted, X, a State corporation, elected to be an S
corporation effective Date 1. On Date 2, A, a shareholder in X, became a nonresident
alien and consequently an ineligible S corporation shareholder. In early Date 3, X
learned that its S corporation election had terminated on Date 2 when A became an
ineligible S corporation shareholder. Subsequently, X and its shareholders took
remedial steps so that as of Date 4, all of X’s shareholders are eligible S corporation
shareholders.

       X represents that it and its shareholders have filed federal tax returns consistent
with the treatment of X as an S corporation. In addition, X represents that the
circumstances resulting in the termination of its S corporation election were inadvertent
and were not motivated by tax avoidance or retroactive tax planning. Finally, X and its
shareholders agree to make any adjustments consistent with the treatment of X as an S
corporation as may be required by the Secretary with respect to the period specified by
§ 1362(f).

                                  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 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
one class of stock.

        Section 1362(d)(2)(A) 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) the corporation ceases to be a small business
corporation. Section 1362(d)(2)(B) provides that any termination 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 terminated under § 1362(d)(2); (2) the Secretary determines
that the circumstances resulting in such termination were inadvertent; (3) no later than a
reasonable period of time after discovery of the circumstances resulting in such
termination, steps were taken so that the corporation for which the termination occurred
is a small business corporation; and (4) the corporation for which the 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

PLR-116488-23                                3

(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 termination, such corporation shall be treated as an S
corporation during the period specified by the Secretary.

                                     CONCLUSION

       Based solely on the facts submitted and the representations made, we conclude
that X's S corporation election terminated on Date 2 when A became an ineligible S
corporation shareholder. We further conclude that the circumstances resulting in the
termination were inadvertent within the meaning of § 1362(f). Accordingly, pursuant to
the provisions of § 1362(f), X will continue to be treated as an S corporation from Date 2
and thereafter, provided X's S corporation election was valid and has not otherwise
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 requested ruling, it is subject to verification on examination.

PLR-116488-23                                               4

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


                                                   Sincerely,



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




Enclosure:
      Copy of this letter for § 6110 purposes



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