PLR 9948017: S election relief after accountant failed to file Form 2553

Plain-English summary

Two shareholders intended their corporation to elect S status when operations began. Their accountant prepared Form 2553 but did not send it to them for signature and filing. The corporation and shareholders nevertheless filed returns consistent with S corporation treatment for two years. The IRS found reasonable cause for the missed election and agreed to treat it as timely for the first year if the corporation filed a completed Form 2553 within 60 days. The IRS did not decide whether the corporation otherwise qualified as a small business corporation.

Ruling snapshot

• Question: Could the unfiled S election be treated as timely for the corporation's first operating year?
• Outcome: Approved if a completed Form 2553, with the ruling attached, was filed within 60 days.
• Key authorities: IRC §§ 1362(b)(5) and 1361(b).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Index Number: 1362.01-03 Washington, DC 20224

Number: 199948017
Person to Contact:
Release Date: 12/3/1999
Telephone Number:

Refer Reply To:
CC:DOM:P&SI:2 - PLR-113483-99
Date:
9/3/99

X =

A =

B =

D1 =

Year 1 =

Year 2 =
Dear
:

This letter is in response to a
July 19, 1999,
and subsequent correspondence, submitted on behalf of X by its authorized representative, requesting a ruling under § 1362(b)(5) of the Internal Revenue Code.
The information submitted states that X was incorporated on D1. However, operations did not begin and shares were not issued until Year 1. A and B each own 50 percent of the stock of X. A, as X’s president, represents that X and its shareholders intended that X elect to be an S corporation beginning in Year 1. The Minutes of the Organization Meeting of the Board of Directors of X indicate that X was to elect S corporation status. X also filed its Form SS-4, Request for Employer Identification Number, indicating that it was an S corporation. A and B relied on X’s accountant in matters pertinent to incorporation and taxes and believed that all forms necessary for X to elect S corporation status were filed with the Internal Revenue Service. However, X’s accountant, after completing a Form 2553, Election by a Small Business Corporation, failed to submit it to X and its shareholders for signature and filing. Therefore, no Form 2553 was filed with the Internal Revenue Service.
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For Year 1 and Year 2, X filed a Form 1120S, U.S. Income Tax Return for an S Corporation. A and B filed their individual tax returns for Year 1 and Year 2 consistent with X being 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
date prescribed by § 1362(b)
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 Year 1 taxable year. Accordingly, provided that X makes an election to be an S corporation by filing a completed Form 2553 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 set forth above, no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision 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 requesting it.
Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
In accordance with the power of attorney on file with this office, a copy of this letter is being sent to X’s authorized representative.

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
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