Corporation could reelect S status before five-year waiting period ended

Plain-English summary

An S corporation's shares were held by a grantor trust whose grantor died. The corporation's S election later terminated, and the trust proposed to sell all shares to a newly formed employee stock ownership plan. The corporation asked to reelect S status before the normal five-year waiting period expired. The IRS found that the corporation had met its burden for early consent under Treas. Reg. § 1.1362-5(a). It allowed a new S election if the corporation filed Form 2553 with the specified effective date within 120 days.

Ruling snapshot

• Question: Could the corporation make a new S election before the five-year post-termination waiting period expired?
• Outcome: Approved. The corporation received 120 days to file the new Form 2553 election.
• Key authorities: IRC §§ 1361 and 1362(g); Treas. Reg. § 1.1362-5(a)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201908009 Third Party Communication: None
Release Date: 2/22/2019 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:B01
PLR-115135-18
Date:
October 30, 2018

Legend

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

State = ---------

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

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

Trust = ----------------------------------------------------------------------------------------------------------------
--------------------------

X = -------------------------------------------------------------
--------------------------

Y = -----------------------------------------------------------------------------------------------------
--------------------------

Year 1 = --------

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

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

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

Date 4 = ----------------------
PLR-115135-18 2

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

   This letter responds to a letter dated April 30, 2018, 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 in Year 1 and made an S corporation

election effective on Date 1. All of Company’s shares were held by Trust, a grantor trust
that was treated (under subpart E of part 1 of subchapter J of chapter 1) as entirely
owned by A. On Date 2, A, grantor of Trust died. A’s spouse, B, became the income
beneficiary of Trust on Date 2. When B died, X and Y became the income beneficiaries
of Trust. On Date 3, Company’s S-election terminated. Trust proposes to sell all of the
Company’s stock to an employee stock ownership plan being formed by the employees
of Company. As a result of the sale, the employee stock ownership plan will be the sole
shareholder of Company. Company requests permission to re-elect to be an S
corporation effective 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 1361(c)(2)(A)(i) provides that, for the purposes of § 1362(b)(1)(B), a trust

all of which is treated (under title 26, subtitle A, chapter 1, subchapter J, part I, subpart
E of the United States Code) as owned by an individual who is a citizen or resident of
the United States may be a shareholder of an S corporation.

    Section 1361(c)(2)(A)(ii) and § 1.1361-1(h)(1)(ii) of the Income Tax Regulations

provide that, for purposes of § 1361(b)(1)(B), a trust that is described in
§ 1361(c)(2)(A)(i) immediately before the death of the deemed owner and that continues
in existence after such death is a permitted shareholder, but only for the two-year period
beginning on the day of the deemed shareholder's death.

     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.
PLR-115135-18 3

   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 prior to Date 4. 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
prior to Date 4 within 120 days following the date of this letter, then such election will be
treated as timely made for Company's taxable year beginning prior to Date 4. 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.
PLR-115135-18 4

   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
                                 Office of Associate Chief Counsel
                                 (Passthroughs and Special Industries)

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