Inadvertent Terminations

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202238009
Release Date: 9/23/2022
Index Number: 1362.00-00, 1362.02-00,
1362.02-02, 1362.04-00
---
---
---
---
---
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
---, ID No. ---
Telephone Number:
---
Refer Reply To:
CC:PSI:03
PLR-107430-22
Date:
June 30, 2022
Legend
X = ---
---
State = ---
Date 1 = ---
Date 2 = ---
Agreement 1 = ---
---
Agreement 2 = ---
---
Dear ---:
This letter responds to a letter dated April 7, 2022, submitted on behalf of X by its authorized representative, requesting a ruling under § 1362(f) of the Internal Revenue Code (Code).

# Facts

The information submitted states X was incorporated under the laws of State and elected to be treated as an S corporation on Date 1.
PLR-107430-22 2
Effective Date 2, X adopted an operating agreement, Agreement 1, containing terms causing X to have more than one class of stock under § 1361(b)(1)(D).
Specifically, section 5.03 of Agreement 1 states that distributions are to be made in accordance with positive capital account balances and also per ownership percentages.
X represents that Agreement 1 created a second class of stock, causing X’s S corporation status to terminate. Upon learning that Agreement 1 terminated X's S election, X replaced Agreement 1 with Agreement 2. X represents that the termination of its S corporation election was inadvertent and not motivated by tax avoidance. The shareholders of X have consented to make any adjustments as may be required by the Secretary.
Company requests relief pursuant to § 1362(f) due to Agreement 1 having governing provisions that created more than one class of stock.

# 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) provides that for purposes of subchapter S, the term ““small business corporation” means a domestic corporation, which is not an ineligible corporation and does not have (A) 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 subsection § 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 1.1361-1(l)(1) provides, in part, that a corporation is generally treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds.
Section 1.1361-1(l)(2)(i) provides that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter, articles of incorporation, bylaws, applicable state laws, and binding agreements relating to distribution and liquidation proceeds (collectively, governing provisions).
Section 1362(a)(1) 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 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 PLR-107430-22 3 which the corporation is an S corporation) such corporation ceases to be a small business corporation.
Section 1362(f) provides, in part, that if (1) an election under § 1362(a) by any corporation (i) 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

(ii) was terminated under § 1362(d)(2) or (3); (2) the Secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent; (3) no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination, steps were taken so that the corporation for which the election was made or the termination occurred is a small business corporation; and

(4) the corporation for which the election was made or the termination occurred, and each person who was a shareholder of the corporation at any time during the period specified pursuant to § 1362(f), agree 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 ineffectiveness or termination, the corporation shall be treated as an S corporation during the period specified by the Secretary.

# Conclusion

Based on the facts submitted and representations made, we conclude that X’s
S election terminated on Date 2, when X signed Agreement 1. 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 or imply no opinion as to the federal income tax consequences of the facts described above under any other provision of the Code, including X's eligibility to be a valid S corporation.
Under a power of attorney on file with this office, we are sending a copy of this letter to your authorized representatives.
This ruling is directed only to the taxpayer who requested 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 PLR-107430-22 4 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,
Richard T. Probst
Senior Technician Reviewer, Branch 3
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosure:
Copy for 6110 purposes cc: