Corporation cannot reelect S status before five years

Plain-English summary

An individual sold all the stock of an S corporation to a C corporation, which terminated the target's S election. The same individual later repurchased the corporation and asked to make a new S election before the five-year waiting period expired. The regulations permit early reelection with IRS consent, but the corporation bears the burden of showing why consent is warranted. The original owner again held all the stock, and the stock sale that caused the termination had been within the control of the corporation and its shareholders. The IRS denied permission to reelect S status before the section 1362(g) waiting period ended.

Ruling snapshot

• Question: Could the corporation make a new S election before the five-year waiting period expired?
• Outcome: Denied.
• Key authorities: IRC § 1362(a), (d), and (g); Treas. Reg. § 1.1362-5(a).

Full text (IRS public release)

Internal Revenue Service                                         Department of the Treasury
                                                                 Washington, DC 20224

Number: 201636033                                                Third Party Communication: None
Release Date: 9/2/2016                                           Date of Communication: Not Applicable
Index Number: 1362.00-00
                                                                 Person To Contact:
--------------------------------------                           -------------------, ID No. ----------------
------------------------------------------                       Telephone Number:
-------------------------                                        --------------------
-----------------------                                          Refer Reply To:
                                                                 CC:PSI:03
                                                                 PLR-139533-15
                                                                 Date:
                                                                 June 06, 2016




X:                 -------------------------------------------
                  -----------------------
Date 1:           ------------------------
Date 2:           -------------- ------
Date 3:           ------------------------
Date 4:           ----------------
Date 5:           ----------------
State:            --------------------
A:                 ------------------------
------------------------------------------
Y:                -------------------------------
                  ----------------------

Dear ----- ---------:

      This letter responds to a letter dated November 30, 2015, and subsequent
correspondence, requesting relief under § 1362(g) of the Internal Revenue Code to
make a new S corporation election prior to the expiration of time provided in § 1362(g).

       The information submitted states that X was formed in State on Date 1 and that it
elected to be treated as an S corporation effective Date 2. On Date 3, A, an individual
who had been the sole shareholder of X, sold 100% of the shares of X to Y, a C
corporation, thereby causing a termination of X’s S corporation election. On Date 4, A
repurchased X. X requests permission to reelect to be an S corporation, effective Date

4. Date 4 is prior to the expiration of the five-year waiting period imposed by § 1362(g).

      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)(A) provides that an election under § 1362(a) shall be
PLR-139533-15                                 2

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(d)(2)(B) provides that any termination under § 1362(d)(2)(A)
is effective on and after the date of cessation.

         Section 1362(g) provides that if a small business corporation has made an
election under § 1362(a) and if such election has been terminated under § 1362(d), the
corporation (and any successor corporation) shall not be eligible to make an election
under § 1362(a) for any taxable year before its fifth taxable year which begins after the
first taxable year for which the termination is effective, unless the Secretary consents to
the election.

       Section 1.1362-5(a) of the Income Tax Regulations provides that absent the
Commissioner’s consent, an S corporation whose election has terminated (or a
successor corporation) may not make a new election for five taxable years as described
in § 1362(g). The Commissioner, however, may permit the corporation to make a new
election before the 5-year period expires.

       The corporation has the burden of establishing that under the relevant facts and
circumstances, the Commissioner should consent to a new election. The fact that more
than 50 percent of the stock in the corporation is owned by persons who did not own
any stock in the corporation on the date of the termination tends to establish that
consent should be granted. In the absence of such fact, consent will ordinarily be
denied unless it can be shown that the event causing the termination was not
reasonably within the control of the corporation or shareholders having a substantial
interest in the corporation, and was not a part of a plan on the part of the corporation or
of such shareholders to terminate the election.

       In the present case, based on all of the facts submitted and representations
made, all of the stock in X is currently held by A, who owned all of the stock in X on the
date of the termination. Thus, not more than 50 percent of the stock in X is owned by
persons who did not own stock in X on the date of the termination. Further, the event
causing the termination, the acquisition by a C corporation, Y, of the stock of X, was
reasonably within the control of X and its shareholders.

       Accordingly, X is denied permission to reelect to be an S corporation prior to the
expiration of the 5-year period prescribed by § 1362(g) of the Code.

       Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, no opinion is expressed regarding whether X is
otherwise eligible to be an S corporation.

      This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of
provides that it may not be used or cited as precedent.
PLR-139533-15                                  3

       Pursuant to a power of attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                               Sincerely,


                                               Bradford R. Poston
                                               Senior Counsel, Branch 3
                                               Office of the Associate Chief Counsel
                                               (Passthroughs and Special Industries)


Enclosures (2)
      Copy of this letter
      Copy for § 6110 purposes


cc: