Election by Small Business Corporation

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202017020
Release Date: 4/24/2020
Index Number: 1362.00-00,
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:B01
PLR-118391-19
Date:
November 22, 2019
Legend
X =
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Y =
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Z =
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Date 1 = ---
Date 2 = ---
Date 3 = ---
Date 4 = ---
State = ---
Dear --- ---:
This responds to a letter dated August 5, 2019 submitted on behalf of X by X’s authorized representatives, requesting inadvertent termination relief under § 1362(f) of the Internal Revenue Code (the Code).

# Facts

According to the information submitted and representations made, X was formed under the laws of State and made an S election effective on Date 1. On Date 2, Y, an eligible S corporation shareholder transferred all of Y’s shares in X to Z, an S corporation wholly owned by Y. On Date 3, X discovered that Z as an S corporation was PLR-118391-19 2 an ineligible shareholder that caused X’s S election to terminate effective Date 2. On Date 4, X and its shareholders took remedial action by having Z transfer all of its shares in X to Y, an eligible S corporation shareholder.
X represents that X's S election termination on Date 2 was inadvertent and not motivated by tax avoidance or retroactive tax planning. X and its shareholders have agreed to make any adjustments required as a condition of obtaining relief under the inadvertent termination rule of § 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)(B) provides that, for purposes of subchapter S, the term
“small business corporation” means a domestic corporation which is not an ineligible corporation and which does not 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, have a nonresident alien as a shareholder, and 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 taxable year for which the corporation is an S corporation) such corporation ceases to be a small business corporation.
Section 1362(f) provides that if (1) an election under § 1362(a) by any corporation (A) was not effective for the taxable year for which made (determined without regard to § 1362(b)(2)) by reason of a failure to meet the requirements of § 1361(b) or to obtain shareholder consents or (B) was terminated under § 1362(d)(2) or (3), (2) the Secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent, (3) no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination, steps were taken (A) so that the corporation is a small business corporation or (B) to acquire the shareholder consents, and (4) the corporation and each person who was a shareholder of the corporation at any time during the period specified pursuant to § 1362(f), 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 or termination, the corporation will be treated as an S corporation during the period specified by the Secretary.

# Conclusion

PLR-118391-19 3
Based solely on the facts submitted and the representations made, we conclude that X’s S corporation election terminated on Date 2 because X had an ineligible shareholder. We further conclude that the termination was inadvertent within the meaning of § 1362(f).
Accordingly, under § 1362(f), X will be treated as continuing to be an S corporation on and after Date 2, provided that X’s S corporation election was valid and not otherwise terminated under § 1362(d).
Except as specifically ruled above, we express no opinion concerning the federal tax consequences of any transaction described above under any other provisions of the Code.
This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
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.
Pursuant to the power of attorney on file with this office, we are sending a copy of this letter to X’s authorized representatives.
Sincerely,
David R. Haglund
David R. Haglund
Branch Chief, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosures (2)
Copy of Letter
Copy for 6110 purposes cc: