Late S corporation elections and inadvertent termination relief granted

Plain-English summary

A corporation and its shareholders intended S corporation treatment, but the entity classification and S elections were not filed on time. The corporation also had an ineligible shareholder, which made or terminated the S election, until the shares were transferred to an eligible shareholder. The IRS granted 120 days to file Form 8832 and Form 2553 with the requested effective date. It also found the termination inadvertent and allowed continuous S corporation treatment, provided the election was otherwise valid and the corporation and shareholders make the required income, basis, and distribution adjustments.

Ruling snapshot

• Question: May the corporation make late entity classification and S corporation elections and receive inadvertent-termination relief for a temporary ineligible shareholder?
• Outcome: Approved, subject to filing both elections within 120 days and making required tax adjustments
• Key authorities: IRC §§ 1361, 1362(b)(5), and 1362(f); Treas. Reg. §§ 301.7701-3 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202522004 Third Party Communication: None
Release Date: 5/30/2025 Date of Communication: Not Applicable
Index Number: 1362.01-03
Person To Contact:
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PLR-116549-24
Date:
February 28, 2025

LEGEND

X = ---------------------------------------------
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Y = ---------------------------------------------
----------------------

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

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

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

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

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

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

This letter responds to a letter dated September 9, 2024, and subsequent
correspondence, 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 § 301.7701-3 to be treated as a corporation for
federal tax purposes, relief to make a late S corporation election under relief under §

PLR-116549-24 2

1362(b)(5) of the Internal Revenue Code (the Code), and relief under § 1362(f) of the
Code.

FACTS

The information submitted states that X was incorporated under the laws of State on
Date 1. X’s shareholders intended that X elect S corporation treatment effective Date 2.

However, X’s Form 2553, Election by a Small Business Corporation, was not timely
filed. In addition, X discovered that one of its shareholders, Y was an ineligible S
corporation shareholder. On Date 3, X and Y took remedial action by having Y transfer
all of its shares in X to an eligible S corporation shareholder, A. X represents that
between Date 1 and Date 3, the shareholder of Y was an eligible shareholder of an S
corporation.

X represents that X and its shareholders have filed tax returns consistent with being an
S corporation for all relevant periods. X further represents that the circumstances
resulting in the invalidity of its S corporation election were inadvertent and were not
motivated by tax avoidance or retroactive tax planning. X and its shareholders have
agreed to make adjustments consistent with the treatment of X as an S corporation, as
may be required by the Secretary.

RULINGS REQUESTED

1. X requests an extension of time under § 301.9100-3 of the Procedure and
   Administration Regulations for X to make a late entity classification election to be
   treated as an association taxable as a corporation effective Date 2;

2. X requests relief for X to make a late S corporation election under § 1362(b)(5) of the
   Code effective Date 2; and

3. X requests relief under § 1362(f) of the Code.

LAW AND ANALYSIS

Ruling 1

Section 301.7701-3(a) provides, in part, that a business entity that is not classified as a
corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) (an eligible entity) can
elect its classification for federal tax purposes as provided in § 301.7701-3. An eligible
entity with at least two members can elect to be classified as either an association (and
thus a corporation under § 301.7701-2(b)(2)) or a partnership, and an eligible entity with
a single owner can elect to be classified as an association or to be disregarded as an
entity separate from its owner.

PLR-116549-24 3

Section 301.7701-3(b)(1) provides that unless the entity elects otherwise, a domestic
eligible entity is: (i) a partnership if it has two or more members; or (ii) disregarded as an
entity separate from its owner if it has a single owner.

Section 301.7701-3(c)(1)(i) provides, in part, that an eligible entity may elect to be
classified other than as provided under § 301.7701-3(b), or to change its classification
by filing Form 8832 with the IRS Service Center designated on the form.

Under § 301.9100-1(c), the Commissioner may grant a reasonable extension of time
under the rules set forth in §§ 301.9100-2 and 301.9110-3 to make a regulatory
election, or a statutory election (but no more than six months except in the case of a
taxpayer who is abroad), under all subtitles of the Internal Revenue Code except
subtitles E, G, H, and I. Section 301.9100-1(b) defines a “regulatory lection” as an
election whose due date is prescribed by a regulation published in the Federal Register,
or a revenue ruling, revenue procedure, notice, or announcement published in the
Internal Revenue Bulletin.

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 automatic extensions of time for making certain elections. Section
301.9100-3 provides extensions of time for regulatory elections that do not meet the
requirements of § 301.9100-2.

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

Ruling 2

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)(5) provides that if (A) an election under § 1362(a) is made for any
taxable year (determined without regard to § 1362(b)(3)), after the date prescribed by
§ 1362(b) for making the election for the taxable year or no § 1362(a) 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 (and § 1362(b)(3) shall not apply).

PLR-116549-24 4

Ruling 3

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 the 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(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(d)(2)(A) provides that an election under § 1362(a) shall be terminated
whenever the corporation ceases to be a small business corporation.

Section 1362(f) provides that if (1) an election under § 1362(a) by any corporation (A)
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 to obtain
shareholder consents, or (B) was terminated under paragraph (2) or (3) of § 1362(d); (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 (A) so that the corporation is a small business corporation, or (B) to acquire
the required shareholder consents, and (4) the corporation, and each person who was a
shareholder of the corporation at any time during the period specified pursuant to
§ 1362(f), agrees to make such adjustments (consistent with the treatment of the
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, the corporation shall be treated as an S corporation during the period
specified by the Secretary.

CONCLUSIONS

Ruling 1

Based solely on the information submitted and the representations made, we conclude
that X has satisfied the requirements of §§ 301.9100-1 and 301.9100-3. As a result, X is
granted an extension of time of 120 days from the date of this letter to file a Form 8832
with the appropriate service center and elect to be treated as an association taxable as

PLR-116549-24 5

a corporation for federal tax purposes, effective Date 2. A copy of this letter should be
attached to the Form 8832.

Ruling 2

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

Ruling 3

Based solely on the information submitted and the representations made, we conclude
that X's S election terminated on Date 2, when shares of X stock were owned by Y. We
further conclude that the termination was inadvertent within the meaning of § 1362(f).

Accordingly, under § 1362(f), X will be treated as continuing to be an S corporation on
and after Date 2, provided that X's S corporation election was valid and not otherwise
terminated under § 1362(d). Y will be treated as a shareholder of X from Date 2 until
Date 3, at which point A will be treated as the shareholder. Accordingly, the
shareholders of X must include in income their pro rata share of the separately stated
and nonseparately computed items of X as provided in § 1366, make any adjustments
to basis as provided in § 1367, and take into account any distributions made by X as
provided in § 1368.

Except as specifically ruled above, we express or imply no opinion as to the federal
income tax consequences of the facts described above under any other provision of the
Code. Specifically, we express or imply no opinion as to whether X was or is otherwise
eligible to be treated as an S corporation.

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

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.

Pursuant to the power of attorney on file with this office, we are sending a copy of this
letter to X's authorized representatives.

PLR-116549-24 6

                                               Sincerely,

                                               Jeffrey A. Erickson
                                               Associate Chief Counsel
                                               (Passthroughs, Trusts, and Estates)

                                         By: ____________________________
                                             Laura C. Fields
                                             Chief, Branch 1
                                             Office of Associate Chief Counsel
                                             (Passthroughs, Trusts, and Estates)

Enclosure
Copy of letter for § 6110 purposes

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