Inadvertent Terminations

Internal Revenue Service
Number: 202317003
Release Date: 4/28/2023
Index Number: 1362.00-00, 1362.04-00
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LEGEND
X = ---
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A = ---
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B = ---
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State = --- p = --- d1 = --- d2 = --- d3 = --- d4 = --- d5 = ---
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:B01
PLR-112247-22
Date:
February 01, 2023
PLR-112247-22 2
This letter responds to a letter, dated June 22, 2022, and subsequent correspondence, on behalf of X from X's authorized representative, requesting inadvertent termination relief under § 1362(f) of the Internal Revenue Code.

# FACTS

According to the information submitted, X was incorporated under the laws of
State on d1, and elected to be treated as an S corporation effective d2. On d3, A, the then sole shareholder of X, transferred p shares of X stock to B. X represents that, from d3, and prior to d4, B was an ineligible shareholder of X. However, X represents that, on d4, B‘s status as an ineligible shareholder of X was modified, causing B to become an eligible shareholder.
B’s status as an ineligible shareholder of X caused X’s status as an S corporation to terminate on d3. A and the fiduciaries of B did not intend to terminate X’s status as an S corporation. X represents that the transfer of shares to B was not motivated by tax avoidance, and neither X nor its shareholders intended to obtain, nor did obtain, a tax benefit by having B as a shareholder.
X, A, and B each filed their United States income tax returns in a manner consistent with the treatment of X as an S corporation. X represents that A included in A’s individual income tax returns for all relevant tax years all separately and nonseparately computed items of income, loss, deduction, and credit of X allocable to
B. X, A, and B each agree to make any adjustments consistent with the treatment of X as an S corporation that the Secretary may require.
X requests a ruling that the termination of its S corporation election was inadvertent within the meaning of §1362(f).

# LAW AND ANALYSIS

Section 1361(a) 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, in part, that 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.
Section 1362(a) provides that, except as provided in §1362(g), a small business corporation may elect to be an S corporation.
Section 1362(d)(2) 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 PLR-112247-22 3 corporation is an S corporation) such corporation ceases to be a small business corporation, and that any termination under § 1362(d)(2) shall be effective on and after the date of cessation.
Section 1362(f) provides, in part, that if -- (1) an election under § 1362(a) by any corporation was terminated under § 1362(d)(2); (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, or to acquire the required shareholder consents; 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 (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.

# CONCLUSION

Based solely on the facts submitted and representations made, we conclude that
X's S corporation election was terminated on d3 because B was an ineligible shareholder of X. We further conclude that the termination of X's S corporation election constituted an inadvertent termination within the meaning of §1362(f). Under the provisions of §1362(f), X will be treated as an S corporation from d3, and thereafter, provided that, apart from the inadvertent termination described above, X's S corporation election was otherwise valid and has not otherwise terminated under §1362(d).
Except as specifically ruled above, we express or imply no opinion concerning the federal tax consequences of the transactions described above under any other provision of the Code. Specifically, except as specifically ruled above, we express or imply no opinion regarding X‘s eligibility to be an S corporation.
PLR-112247-22 4
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,
/s/
Joy C. Spies
Senior Technician Reviewer, Branch 1
IRS Office of Chief Counsel
(Passthroughs & Special Industries)
Enclosure (1) cc: ---
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