New owners may re-elect S corporation status early, waiving the usual five-year wait after a prior termination

Plain-English summary

When a corporation's S election is terminated, § 1362(g) normally bars it from
electing S status again for five years unless the IRS consents. Here the sole
shareholder had voluntarily terminated the company's S election, then died. The
estate held the stock and later distributed it to two beneficiaries, who now want
the company taxed as an S corporation again, sooner than the five-year window
allows. The regulations say that when more than 50% of the stock is owned by
people who did not own any at the time of the termination, that fact tends to
support granting consent. Because the new owners were not owners when the
election was terminated, the IRS concluded the company met its burden and
consented to an early re-election, provided the company files Form 2553 within
120 days. The IRS expressed no opinion on whether the company otherwise
qualifies as an S corporation.

Ruling snapshot

• Question: Will the IRS consent to an early re-election of S corporation status before the five-year waiting period under § 1362(g) expires?
• Outcome: Approved (consent granted; Form 2553 due within 120 days)
• Key authorities: IRC § 1362(g); Treas. Reg. § 1.1362-5(a)

Full text (IRS public release)

Internal Revenue Service                                Department of the Treasury
                                                        Washington, DC 20224

Number: 201839011                                       Third Party Communication: None
Release Date: 9/28/2018                                 Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.01-00,
              1362.01-02                                Person To Contact:
                                                        --------------------, ID No. ------------------
----------------------------------------                Telephone Number:
--------------------                                    ----------------------
--------------------------                              Refer Reply To:
----------------------------------                      CC:PSI:01
                                                        PLR-108012-18
                                                        Date:
                                                        June 15, 2018




LEGEND

Company = -----------------------------------------------------------
                       ------------------------

A             = ------------------------
                         -------------------------

B             = --------------------
                         -------------------------

C             = ----------------------
                         -------------------------

State         = --------------

Date 1        = --------------------------

Date 2        = ----------------------

Date 3        = -------------------

Date 4        = --------------------

Date 5        = ----------------------


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

This letter responds to a letter dated March 12, 2018, and subsequent correspondence,
submitted on behalf of Company by its authorized representative, requesting a ruling
under § 1362(g) of the Internal Revenue Code.

                                          FACTS

Company was incorporated in State on Date 1. Effective Date 2, A, Company’s sole
shareholder, elected to terminate Company’s S election. In Date 3, A died. A’s estate
held A’s Company stock until it disbursed the stock to A’s beneficiaries, B and C, on
Date 4. B and C want Company to be an S corporation and request permission for
Company to re-elect to be an S corporation effective Date 5. Date 5 is prior to the
expiration of the five-year waiting period imposed by § 1362(g).

                                  LAW AND ANALYSIS

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)(1) provides that an election under § 1362(a) may be terminated by
revocation.

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.

                                      CONCLUSION

Based solely on the facts submitted and representations made, we conclude that
Company has met its burden under § 1.1362-5(a). We grant permission for Company to
re-elect to be an S corporation effective Date 5. Accordingly, provided that Company
makes an election to be an S corporation by filing a completed Form 2553, Election by a

Small Business Corporation, with the appropriate service center effective Date 5 within
120 days following the date of this letter, then such election will be treated as timely
made for Company’s taxable year beginning Date 5. A copy of this letter should be
attached to the Form 2553.

Except as expressly provided herein, we express or imply no opinion concerning the
Federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, we express or imply no opinion concerning
whether Company is otherwise eligible to be an S corporation.

In accordance with a power of attorney on file with this office, we are sending a copy of
this letter to Company’s authorized representative.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) 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
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,

                                                  Laura C. Fields

                                                  Laura C. Fields
                                                  Senior Technician Reviewer, Branch 1
                                                  (Passthroughs and Special Industries)



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


cc: