Inadvertent Terminations

Internal Revenue Service
Number: 201848004
Release Date: 11/30/2018
Index Number: 1362.02-00, 1362.04-00,
1362.02-03
---
---
---
---
LEGEND
Company = ---
---
State = ---
Date 1 = ---
Date 2 = ---
Date 3 = ---
Date 4 = ---
Date 5 = ---
Date 6 = ---
$a = ---
$b = ---
Dear ---:
Department of the Treasury
Washington, DC 20224
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
---, ID No. ---
Telephone Number:
---
Refer Reply To:
CC:PSI:01
PLR-106313-18
Date:
July 30, 2018
This letter responds to a letter dated February 23, 2018, and subsequent correspondence, submitted on behalf of Company by Company's representative, requesting a ruling under § 1362(f) of the Internal Revenue Code.
PLR-106313-18 2

# FACTS

According to the information submitted, Company was incorporated under the laws of
State on Date 1 and elected to be treated as an S corporation effective Date 2. At the close of three consecutive taxable years ending Date 5, Company had subchapter C accumulated earnings and profits of $a. Moreover, for each taxable year ending Date 3, Date 4, and Date 5, Company had passive investment income (within the meaning of § 1362(d)(3)) in excess of 25 percent of its gross receipts. As a result, Company's S corporation election terminated on Date 6.
Company represents that the circumstances resulting in the termination of Company's S corporation election were inadvertent and were not motivated by tax avoidance or retroactive tax planning. Company and its shareholders have consistently treated Company as an S corporation and agree to make any adjustments consistent with the treatment of Company as an S corporation as may be required by the Secretary.

# 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 1362(d)(3)(A)(i) provides that an election under § 1362(a) shall be terminated whenever the corporation has accumulated earnings and profits at the close of each of three consecutive taxable years, and has gross receipts for each of the taxable years more than 25 percent of which are passive investment income.
Section 1362(d)(3)(A)(ii) provides that the termination under § 1362(d)(3) shall be effective on and after the first day of the first taxable year beginning after the third consecutive taxable year referred to in § 1362(d)(3)(A)(i).
Section 1362(d)(3)(C)(i) defines the term “passive investment income” to mean, except as otherwise provided in § 1362(d)(3), gross receipts derived from royalties, rents, dividends, interest, and annuities.
Section 1362(f) provides, in 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 termination occurred, and each person who was a shareholder in such corporation at any time during the period specified pursuant to § 1362(f), agrees to make such adjustments PLR-106313-18 3 (consistent with the treatment of such corporation as an S corporation) as may be required by the Secretary with respect to such period, then, notwithstanding the circumstances resulting in such termination, such corporation shall be treated as an S corporation during the period specified by the Secretary.
Section 1375(a) provides that if an S corporation has accumulated earnings and profits at the close of a taxable year and gross receipts for that taxable year more than 25 percent of which are passive investment income, then there is imposed a tax on the income of such corporation for such taxable year. Such tax shall be computed by multiplying the excess net passive income by the highest rate of tax specified in § 11(b).

# CONCLUSION

Based solely on the representations made and the information submitted, we conclude that Company's S corporation election terminated on Date 6, under § 1362(d)(3)(A) because Company had subchapter C earnings and profits at the close of each of three consecutive taxable years ending on Date 5, and had gross receipts for each of those taxable years more than 25 percent of which were passive investment income. We further conclude that the termination of Company's S corporation election was an inadvertent termination within the meaning of § 1362(f).
Pursuant to the provisions of § 1362(f), Company will be treated as continuing to be an
S corporation beginning on Date 6, and thereafter, provided that Company's S corporation election was valid and has not otherwise terminated under § 1362(d) and the following conditions are met.
This letter ruling is subject to the following condition: an adjustment under § 1362(f)(4),
Company must send a payment of $b with a copy of this letter to the following address:
Internal Revenue Service
Cincinnati Service Center
201 West Rivercenter Blvd.
Covington, KY 41011
Stop 31
Manual Deposit
Company must send this payment no later than 45 days from the date of this letter. If all the above conditions are not met, then this ruling is null and void. Furthermore, if these conditions are not met, Company must notify the Cincinnati Service Center that its S corporation election has terminated.
Except as expressly provided herein, we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this PLR-106313-18 4 letter. Specifically, we express or imply no opinion regarding Company's eligibility to be 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.
In accordance with a power of attorney on file with this office, we are sending a copy of this letter to your authorized representative.
The ruling contained in this letter is 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 ruling request, it is subject to verification on examination.
Sincerely,
Joy C. Spies
Joy C. Spies
Senior Technician Reviewer, Branch 1
(Passthroughs and Special Industries)
Enclosures (2)
Copy of letter
Copy of letter for §6110 purposes