Reasonable cause found for a late S corporation election

Plain-English summary

A newly incorporated company intended to be taxed as an S corporation (which passes income through to shareholders and avoids corporate-level tax) starting from a specific effective date. To get that status it had to file Form 2553 by a deadline, but it inadvertently missed it. It asked the IRS for relief under section 1362(b)(5), which lets the IRS treat a late S election as timely if the company shows reasonable cause for the delay. The IRS found reasonable cause and granted relief, so the S election will be treated as timely if the company files a completed Form 2553 within 120 days, and if it and its shareholders file all required returns consistent with S status. The IRS did not decide whether the company otherwise qualifies as an S corporation. This is one of the most common determinations the IRS issues, fixing a missed election deadline.

Ruling snapshot

• Question: Was there reasonable cause to treat a late-filed S corporation election as timely?
• Outcome: approved
• Key authorities: IRC § 1362(b)(5)

Full text (IRS public release)

 Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

 Number: 202451013                                            Third Party Communication: None
 Release Date: 12/20/2024                                     Date of Communication: Not Applicable
 Index Number: 1362.00-00, 1362.01-03
                                                              Person To Contact:
 ------------------------------------                         ----------------------, ID No. -----------------
 -----------------------------------------                    Telephone Number:
 --------------------------------------                       --------------------
 -----------------------------                                Refer Reply To:
 -----------------------------------                          PSI:B01
                                                              PLR-108279-24
                                                              Date:
                                                              September 18, 2024




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

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

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

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


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

This letter responds to a letter dated March 12, 2024, and subsequent correspondence,
submitted on behalf of X by its authorized representatives, requesting a ruling under §
1362(b)(5) of the Internal Revenue Code (Code).

                                                   FACTS

According to the information submitted, X was incorporated under the laws of State on
Date 1. X represents that it intended to be treated as an S corporation effective Date 2.
However, X inadvertently failed to timely file a Form 2553, Election by a Small Business
Corporation.

                                             LAW AND ANALYSIS

Section 1362(a)(1) provides that, except as provided in § 1362(g), a small business
corporation may elect, in accordance with § 1362, to be an S corporation.

Section 1362(b)(1) provides that an election under § 1362(a) may be made by a small
business corporation for any taxable year (A) at any time during the preceding taxable
year, or (B) at any time during the taxable year and on or before the 15th day of the
third month of the taxable year.

Section 1362(b)(3) provides that if (A) a small business corporation makes an election
under § 1362(a) for any taxable year, and (B) such election is made after the 15th day
of the third month of the taxable year and on or before the 15th day of the third month of
the following taxable year, then such election is treated as made for the following
taxable year.

Section 1362(b)(5) provides that if (A) an election under § 1362(a) is made for any
taxable year after the date prescribed by § 1362(b) for making the election for the
taxable year or no such election is made for any taxable year, and (B) the Secretary
determines that there was reasonable cause for the failure to timely make such election,
the Secretary may treat such an election as timely made for the taxable year.

                                      CONCLUSION

Based solely on the facts submitted and representations made, we conclude that X has
established reasonable cause for failing to make a timely S corporation election
effective Date 2 and is eligible for relief under § 1362(b)(5). Accordingly, provided that
X makes an election to be an S corporation by filing a completed Form 2553 effective
Date 2 with the appropriate service center within 120 days from the date of this letter,
then such election will be treated as timely made.

Further, this ruling is contingent on X and its shareholders filing within 120 days from
the date of this letter all required returns for all open years consistent with the requested
relief. A copy of this letter should be attached to any such returns and to the Form
2553.

Except as specifically set forth above, we express or imply no opinion concerning the
federal tax consequences of the facts described above under any other provision of the
Code and the regulations thereunder. Specifically, no opinion is expressed or implied
concerning whether X otherwise qualifies as an S corporation for federal tax purposes.

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.

This ruling is directed to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

Pursuant to a power of attorney on file with this office, a copy of this letter is being sent
to X’s authorized representative.



                                                    Sincerely,



                                                    Christiaan T. Cleary
                                                    Assistant to the Branch Chief, Branch 1
                                                    Office of the Associate Chief Counsel
                                                    (Passthroughs & Special Industries)


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