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

Plain-English summary

An S corporation is a small business that passes its income through to its shareholders instead of paying corporate tax, but only shareholders who meet strict eligibility rules can own its stock. Here a corporation had been taxed as an S corporation until all of its shares were bought by a buyer who did not qualify as an eligible S corporation shareholder, which automatically ended the company's S election. Ownership later shifted again to a new owner. Normally, once an S election is terminated, the company must wait five tax years before it can elect S status again, unless the IRS consents to an earlier election. The IRS may consent when the event that caused the termination was outside the control of the people running the company and was not part of a plan to end the election. The IRS concluded that the disqualifying stock purchase was not within the new owner's control and was not part of a plan to terminate the election, so it granted permission to re-elect S corporation status early, provided the company files Form 2553 within 120 days.

Ruling snapshot

• Question: May the corporation re-elect S corporation status before the five-year waiting period of § 1362(g) has run?
• Outcome: approved
• Key authorities: IRC § 1362(g); Treas. Reg. § 1.1362-5(a)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202501005                                              Third Party Communication: None
Release Date: 1/3/2025                                         Date of Communication: Not Applicable
Index Number: 1362.01-02
                                                               Person To Contact:
--------------------------                                     ----------------------, ID No. -----------------
------------------------------------------                     Telephone Number:
------------------------------                                 --------------------
-----------------------------------                            Refer Reply To:
                                                               CC:PSI:B03
                                                               PLR-106831-24
                                                               Date:
                                                               September 30, 2024




Legend

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

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

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

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

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

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

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

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

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

n          =    ---

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

This letter responds to a letter dated March 27, 2024, submitted on behalf of X by its
authorized representative requesting a ruling under § 1362(g) of the Internal Revenue
Code (Code).
PLR-106831-24                               2


                                         FACTS

      The information submitted states that X was incorporated on Date 1, under the
laws of State. Effective Date 2, X elected to be taxed as an S corporation.

       On Date 3, Y purchased 100% of X’s shares. X represents that Y was not an
eligible S corporation shareholder on Date 3. As a result, X’s S corporation election
terminated on Date 3.

       On Date 4, A purchased 100% of X’s shares from Y. A owned n% of X’s shares
prior to Y’s purchase of X on Date 3. X is requesting permission to elect to be an S
corporation effective Date 5, prior to the termination of the five-year waiting period
imposed by § 1362(g).

                                 LAW AND ANALYSIS

      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)(A) provides that an election under § 1362(a) shall be
terminated whenever (at any time on or after the 1st day of the 1st taxable year for
which the corporation is an S corporation) such corporation ceases to be a small
business corporation.

         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) shall not be eligible to make an election
under § 1362(a) for any taxable year before its fifth taxable year which begins after the
first taxable year for which such termination is effective, unless the Secretary consents
to such election.

        Section 1.1362-5(a) of the Income Tax Regulations provides, in part, 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.
PLR-106831-24                                3

                                     CONCLUSION

       Based solely on the facts and the representations submitted, we conclude that
the event causing the termination of X’s S corporation election was not reasonably
within the control of A and was not part of a plan on the part of A to terminate the
election. Therefore, X is granted permission to make an election to be an S corporation
effective Date 5.

       Accordingly, provided that X makes an election to be an S corporation by filing a
completed Form 2553 with the appropriate service center effective Date 5 within 120
days following the date of this letter, then such election will be treated as timely made
for X’s taxable year beginning Date 5. A copy of this letter should be attached to the
Form 2553.

      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. Specifically, no opinion is expressed regarding whether X is
otherwise eligible to be an S corporation.

     The ruling contained in this letter is based on 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 only to the taxpayer that requested in. 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, we are sending a copy of
this letter to X’s authorized representative.

                                                 Sincerely,

                                                 Richard T. Probst

                                                 _____________________________
                                                 Richard T. Probst
                                                 Senior Technician Reviewer, Branch 3
                                                 Office of the Associate Chief Counsel
                                                 (Passthroughs & Special Industries)


Enclosure
   Copy for § 6110 purposes
PLR-106831-24                                       4

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