Inadvertent Terminations

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202419011
Release Date: 5/10/2024
Index Numbers: 1361.00-00, 1361.01-03,
1362.00-00, 1362.02-00,
1362.02-02, 1362.04-00
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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:B3
PLR-116488-23
Date:
February 15, 2024
LEGEND
X = ---
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A = ---
Date 1 = ---
Date 2 = ---
Date 3
Date 4
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State = ---
Dear ---:
This letter responds to a letter dated August 3, 2023, and subsequent correspondence, submitted on behalf of X by X's authorized representative, requesting a ruling under § 1362(f) of the Internal Revenue Code (the Code).
PLR-116488-23 2

# FACTS

According to the information submitted, X, a State corporation, elected to be an S corporation effective Date 1. On Date 2, A, a shareholder in X, became a nonresident alien and consequently an ineligible S corporation shareholder. In early Date 3, X learned that its S corporation election had terminated on Date 2 when A became an ineligible S corporation shareholder. Subsequently, X and its shareholders took remedial steps so that as of Date 4, all of X’s shareholders are eligible S corporation shareholders.
X represents that it and its shareholders have filed federal tax returns consistent with the treatment of X as an S corporation. In addition, X represents that the circumstances resulting in the termination of its S corporation election were inadvertent and were not motivated by tax avoidance or retroactive tax planning. Finally, X and its shareholders agree to make any adjustments consistent with the treatment of X as an S corporation as may be required by the Secretary with respect to the period specified by § 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) defines a “small business corporation” as a domestic corporation which is not an ineligible corporation and which does not (A) have 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 § 1361(c)(6)) who is not an individual, (C) have a nonresident alien as a shareholder, and (D) have more than one class of stock.
Section 1362(d)(2)(A) provides that an election under § 1362(a) is terminated whenever (at any time on or after the first day of the first taxable year for which the corporation is an S corporation) the corporation ceases to be a small business corporation. Section 1362(d)(2)(B) provides that any termination under § 1362(d)(2) is effective on and after the date of cessation.
Section 1362(f) provides, in relevant 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; 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 the adjustments PLR-116488-23 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.

# CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that X's S corporation election terminated on Date 2 when A became an ineligible S corporation shareholder. We further conclude that the circumstances resulting in the termination were inadvertent within the meaning of § 1362(f). Accordingly, pursuant to the provisions of § 1362(f), X will continue to be treated as an S corporation from Date 2 and thereafter, provided X's S corporation election was valid and has not otherwise terminated under § 1362(d).
Except as specifically ruled upon above, we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the Code. Specifically, we express or imply no opinion regarding X's eligibility to be an S corporation.
This ruling is directed only to the taxpayer who requested it. According to
§ 6110(k)(3), 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 requested ruling, it is subject to verification on examination.
PLR-116488-23 4
Pursuant to a power of attorney on file with this office, we are sending a copy of this letter to your authorized representative.
Sincerely,
Mary Beth Carchia
Senior Technician Reviewer, Branch 3
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosure:
Copy of this letter for § 6110 purposes cc: ---
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