PLR 9934005: Late filing of charter amendments did not defeat S corporation relief

Plain-English summary

A corporation elected S corporation treatment before filing state charter amendments needed to eliminate a second class of stock. That made it ineligible when the election was supposed to take effect. The IRS found the ineffective election inadvertent and ruled that the corporation would be treated as an S corporation from the intended effective date, provided its election was not otherwise terminated and its shareholders made any required adjustments. The IRS did not decide whether the corporation had made an otherwise valid S election.

Ruling snapshot

• Question: Could the corporation receive relief for an ineffective S election caused by late filing of charter amendments?
• Outcome: Approved under the inadvertence relief rule, subject to stated conditions.
• Key authorities: IRC §§ 1361(b)(1), 1362(f).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Index Number: 1362.04-00 Washington, DC 20224

Number: 199934005
Person to Contact:
Release Date: 8/27/1999

Refer Reply To:
CC:DOM:P&SI:1-PLR-100826-99
Date:
May 18, 1999

Legend

X
=

Date 1 =

Date 2 =

State =

This responds to a letter dated December 21, 1998, submitted on behalf of X requesting relief under § 1362(f) of the Internal Revenue Code.

FACTS

X elected to be treated as an S corporation effective Date 1. As of Date 1, however, X was ineligible to be an S corporation solely due to a failure to file with State certain amendments to X’s articles of incorporation that were required to eliminate X’s second class of stock. Those amendments to X’s articles of incorporation were filed with State on Date 2. All of the shareholders of X have consented to any adjustments (consistent with the treatment of X as an S corporation) as may be required.

LAW AND ANALYSIS

Section 1361(a)(1) defines an "S corporation" as a small business corporation for which an election under section 1362(a) is in effect. 2 CC:DOM:P&SI:1-PLR-100826-99

Section 1361(b)(1) defines a “small business corporation” as a domestic corporation which is not an ineligible corporation which does not (A) have more than 75 shareholders, (B) have as a shareholder a person (other than an estate and other than a trust described in subsection (c)(2)) who is not an individual, (C) have a nonresident alien as a shareholder, and (D) have more than 1 class of stock.

Section 1362(f) provides that if (1) an election under § 1362(a) by any corporation was not effective for the taxable year for which made by reason of a failure to meet the requirements of section 1361(b), (2) the Secretary determines that the circumstances resulting in such ineffectiveness were inadvertent, (3) no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness, steps were taken so that the corporation is a small business corporation, and (4) the corporation, and each person who was a shareholder of the corporation at any time during the period of inadvertent ineffectiveness of the S election, 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 the ineffectiveness, the corporation is treated as an S corporation during the period specified by the Secretary.

CONCLUSION

Based solely on the representations made, we conclude that X was ineligible to elect to be an S corporation as of Date 1. We also conclude that the circumstances resulting in the ineffectiveness of X’s S election were inadvertent. Therefore, X will be treated as an S corporation effective Date 1 and thereafter, provided X’s S corporation election is not otherwise terminated and provided the shareholders of X make any required adjustments.

Except as specifically set forth above, no opinion is expressed or implied as to the federal income tax consequences of the transaction described under any other provision of the Code. In particular, no opinion is expressed as to whether X made an otherwise valid subchapter S election under section 1362.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. As provided by a 3 CC:DOM:P&SI:1-PLR-100826-99

power of attorney on file in this office, a copy of this letter is being sent to your authorized representatives.

Sincerely yours,

Signed/David R. Haglund

DAVID R. HAGLUND
Senior Technician Reviewer
Branch 1
Office of the Assistant Chief Counsel
(Passthroughs and Special Industries)

Enclosures: 2
Copy of this letter
Copy for § 6110 purposes