Inadvertent Terminations

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201817015
Release Date: 4/27/2018
Index Number: 1362.00-00, 1362.04-00,
1362.01-00, 1362.02-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B03
PLR-130168-17
Date:
January 24, 2018
LEGEND
X = ---
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A = ---
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State = ---
IRAs = ---
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Date 1 = ---
Date 2 = ---
Date 3 = --- n = ---
Dear ---:
PLR-130168-17 2
This letter responds to a letter dated September 29, 2017 submitted on behalf of
X by X’s authorized representative, requesting a ruling under § 1362(f) of the Internal
Revenue Code.

# FACTS

X was incorporated under the laws of State on Date 1. X made an S corporation election effective Date 2. On Date 3, A transferred shares of X stock to IRAs. IRAs were ineligible shareholders and, as a result, X’s S corporation election was terminated.
Upon learning of the termination of its S corporation status, X redeemed all of the X stock owned by the IRAs.
X represents that X and its shareholders intended for X to be an S corporation effective Date 2 and that X has filed all returns consistent with X’s status as an S corporation since Date 2. X further represents that during n all income of X attributable to the IRAs was allocated to the IRAs’ respective beneficiaries as though the beneficiaries owned the stock directly. X represents that the circumstances resulting in the termination of X’s S corporation election were inadvertent and not motivated by tax avoidance or retroactive tax planning. X and X’s shareholders agree to make any adjustments consistent with the treatment of X as an S corporation as may be required by the Secretary with respect to the period specified by § 1362(f).

# LAW AND ANALYSIS

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 such 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(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(f) provides, in pertinent part, that if (1) an election under § 1362(a) by any corporation was terminated under § 1362(d)(2) or (3); (2) the Secretary determines that the circumstances resulting in such termination were inadvertent; (3) no later than a reasonable period of time after discovery of the circumstances resulting in such termination, steps were taken so that the corporation for which the termination occurred is a small business corporation; and (4) the corporation for which the PLR-130168-17 3 termination occurred, and each person who was a shareholder of the corporation at any time during the period specified pursuant to § 1362(f), agrees to make the adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to this period, then, notwithstanding the circumstances resulting in such termination, the corporation shall be treated as an S corporation during the period specified by the Secretary.

# CONCLUSION

Based solely on the information submitted and the representations made, we conclude that X’s S corporation election terminated on Date 3 because X had an ineligible shareholder. We further conclude that the termination was inadvertent within the meaning of § 1362(f). Pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S corporation from Date 3, and thereafter, provided that X’s S corporation election was otherwise valid and has not otherwise terminated under § 1362(d).
The rulings contained in this letter are based upon 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 request for rulings, it is subject to verification on examination.
Except as specifically ruled above, we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provisions of the Code, including X’s eligibility to be a valid S corporation.
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 your authorized representative.
Sincerely,
Bradford R. Poston
Special Counsel
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosures (2)
Copy of this letter
Copy for § 6110 purposes cc: