PLR 9936028: Late S election allowed with both shareholders' signatures

Plain-English summary

A corporation's original shareholder intended to elect S corporation status from its first tax year but did not know Form 2553 had to be filed. The corporation filed an S corporation return, and the original shareholder later sold the shares to a new owner who also wanted S status. The IRS found reasonable cause for the missed election and agreed to treat it as timely under section 1362(b)(5). The company must file Form 2553 for its first year, signed by both shareholders, within 60 days and attach the ruling. The IRS did not decide whether the company met the separate small business corporation requirements of section 1361(b).

Ruling snapshot

• Question: Can the corporation's missed S election be treated as timely for its first tax year?
• Outcome: Approved if Form 2553 is filed within 60 days with both the former and current shareholders' signatures.
• Key authorities: IRC §§ 1361(b), 1362(b)(5)

Full text (IRS public release)

INTERNAL REVENUE SERVICE
Index No.: 1362.01-03

Number: 199936028
Release Date: 9/10/1999

CC:DOM:P&SI:2 - PLR-103437-99

June 9, 1999

X =

A =

B =

D1 =

D2 =

Year 1 =

Dear :

This responds to your letter dated February 3, 1999, and subsequent correspondence, written on behalf of X, requesting a ruling under § 1362(b)(5) of the Internal Revenue Code.

The information submitted states that X was incorporated on D1 of Year 1. The sole shareholder of X at the time of the incorporation of X was A. A subsequently sold A’s interest in X to B in D2. A, as X's president at the time of the incorporation of X, represents that it was A’s intent that X elect to be an S corporation effective for X's first taxable year, Year 1. The minutes of the first meeting of the board of directors for X reflect the intent of A that X elect S corporation status. However, A did not understand the requirement to file Form 2553, Election by a Small Business Corporation. Therefore, a Form 2553 was not filed for X. X filed its return for Year 1 on Form 1120S, U.S. Income Tax Return for an S Corporation. B, as the current president of X, represents that it is B’s intent that X be an S corporation.

Section 1362(b)(5) of the Code provides that if--(A) an election under § 1362(a) is made for any taxable year after the

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date prescribed by § 1362(b) for making such election for such 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 such taxable year.

Based solely on the facts and the representations submitted, we conclude that X has established reasonable cause for failing to make a timely election to be an S corporation for X's first taxable year. Accordingly, provided that X makes an election to be an S corporation by filing a Form 2553, signed by both A and B, with the appropriate service center effective for its Year 1 taxable year, within 60 days following the date of this letter, then such election will be treated as timely made for X's Year 1 taxable year. A copy of this letter should be attached to the Form 2553.

Except as specifically ruled upon above, no opinion is expressed concerning the federal tax consequences of the facts described above under any other provisions of the Code, including whether X was or is a small business corporation under § 1361(b) of the Code.

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.

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Pursuant to the power of attorney on file with this office, a copy of this letter is being sent to X.

Sincerely yours,

H. GRACE KIM
Assistant to the Chief
Branch 2
Office of the Assistant
Chief Counsel
(Passthroughs and
Special Industries)

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