PLR 202221003

Inadvertent Terminations

Official textIRS Written Determinations (PLR · TAM · CCA)irs.gov

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202221003
Release Date: 5/27/2022
Index Number: 1362.04-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
---, ID No. ---
Telephone Number:
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Refer Reply To:
CC:PSI:B03
PLR-119345-21
Date:
March 02, 2022
Legend
X = ---
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State = ---
A = ---
Date 1 = ---
Date 2 = ---
Date 3 = ---
Dear ---:
This letter responds to a letter dated September 10, 2021, and subsequent correspondence, submitted on behalf of X by its authorized representative requesting a ruling under § 1362(f) of the Internal Revenue Code (Code).

# Facts

According to the information submitted and representations made, X, organized under the laws of State, made an election to be treated as an S corporation on Date 1.	X’s election was inadvertently terminated effective Date 2, because membership interests in
X were transferred to A, an ineligible shareholder under § 1361(b)(1)(C). On Date 3, A transferred all of A’s interest in X to eligible S corporation shareholders.	The termination of X’s S corporation election due to the transfer of stock to A, an ineligible

PLR-119345-21 2 shareholder on Date 2, was discovered during a review in connection with a proposed transaction.
X represents that the termination was not motivated by tax avoidance or retroactive tax planning. X further represents that for the period beginning Date 2 and through Date 3, X, X’s shareholders, and A have filed their respective income tax returns consistent with X’s S corporation election. X, its shareholders, and A have agreed to make any adjustments that the Secretary may require, consistent with the treatment of X as an S corporation.

# Law and Analysis

Section 1362(a) provides that, except as provided in § 1362(g), a small business corporation may elect, in accordance with the provisions of § 1362, to be an S corporation.
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)(C) provides that a domestic corporation cannot be a “small business corporation” if the corporation has a non-resident alien as a shareholder.
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 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 termination were inadvertent; (3) no later than a reasonable period of time after discovery of the circumstances resulting in termination, steps were taken so that the corporation is a small business corporation, 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 the adjustments (consistent with the treatment of the corporation as an S corporation) as might be required by the Secretary regarding this period, then, notwithstanding the circumstances resulting in termination, the corporation shall be treated as an S corporation during the period specified by the Secretary.

# Conclusion

Based solely on the facts submitted and representations made, we conclude the existence of an ineligible shareholder under § 1361(b)(1)(C) caused X's S corporation election to terminate on Date 2. We further conclude that the circumstances resulting in PLR-119345-21 3 the termination on Date 2, were inadvertent within the meaning of § 1362(f).
Accordingly, under § 1362(f), X will be treated as an S corporation from Date 2, and thereafter, provided X's S corporation election was otherwise valid and has not otherwise terminated under § 1362(f).
This ruling is conditioned upon X and all its shareholders treating X as having been an S corporation from Date 2 to Date 3, and thereafter. Moreover, the shareholders of X must include their pro rata share of the separately stated and nonseparately computed items of income, loss, deduction, or credit as provided in § 1366, make any adjustments to basis as provided in § 1367, and take into account any distributions made by X as provided in § 1368. If X or its shareholders fail to treat themselves as described above, this ruling is null and void.
Except as specifically ruled upon above, we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the Code, including whether X was otherwise a valid S corporation.
This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of the
Code provides that this ruling 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 a power of attorney on file with this office, we are sending a copy of this letter to your authorized representative.
Sincerely,
/S/
____
Richard T. Probst
Senior Technician Reviewer, Branch 3
Office of Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosure:
Copy for § 6110 purposes cc:

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