Inadvertently terminated S corporation elections restored under § 1362(f)

Plain-English summary

Three related corporations had each elected to be taxed as an S corporation,
a pass-through status that avoids corporate-level tax but comes with strict
ownership rules. During a restructuring, a newly formed LLC (itself electing
S status) acquired stock of the three corporations, and that ownership
structure accidentally violated the S corporation eligibility rules, which
terminated all three S elections. The companies' advisors were told about the
problem but failed to fix it for a couple of years. The taxpayers asked the
IRS for relief under Internal Revenue Code § 1362(f), which lets the IRS
disregard an inadvertent termination if the lapse was not tax-motivated,
prompt corrective steps were taken, and everyone agrees to any adjustments the
IRS requires. The IRS concluded the terminations were inadvertent and ruled
that the three corporations continue to be treated as S corporations from
their original election dates forward, so long as the elections were otherwise
valid and the taxpayers follow through on the required treatment.

Ruling snapshot

• Question: Were the terminations of the corporations' S elections
  inadvertent, so that § 1362(f) relief lets them keep S status?
• Outcome: Approved (inadvertent termination relief granted)
• Key authorities: IRC § 1362(f); IRC § 1361(b)(3)(B)(ii)

Full text (IRS public release)

 Internal Revenue Service                                         Department of the Treasury
                                                                  Washington, DC 20224

 Number: 201908019                                                Third Party Communication: None
 Release Date: 2/22/2019                                          Date of Communication: Not Applicable
 Index Number: 1362.00-00, 1362.04-00,
               1361.05-00                                         Person To Contact:
                                                                  -----------------------, ID No. ----------------
 -------------------------------------                            Telephone Number:
 ------------------------------------------------                 ----------------------
 -----------------------------------------------------            Refer Reply To:
 ---------------------------------                                CC:PSI:B03
 -------------------------------                                  PLR-127266-18;
 ---------------------------                                      PLR-127267-18;
                                                                  PLR-127268-18
Legend                                                            Date:
                                                                  November 13, 2018
W:            -------------------------------------------------
------------------------------------------------------------
             TIN: -----------------

X:            -------------------------------------------------
-----------------------------------------------------------
             TIN: -----------------

Y:           ---------------------------------
             TIN: -----------------

Z:           -----------------------------
             TIN: -----------------

State:       ---------

Date 1:      ---------------------

Date 2:      ----------------------------

Date 3:      --------------------------

Date 4:      ---------------------

Date 5:      -----------------------

Date 6:      ---------------------------

Year 1:      --------

Year 2:      -------
                                              2

Year 3:    --------

Year 4:    --------

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

 This letter responds to a letter dated September 11, 2018, submitted on behalf of W, X
 and Y (each, a Corporation, and collectively, Corporations) requesting a ruling under
 § 1362(f) of the Internal Revenue Code (Code).

 FACTS

 W, X and Y were incorporated under the laws of State on Date 1, Date 2 and Date 3,
 respectively. W, X and Y made a timely S corporation election effective for each
 Corporation’s respective date of incorporation.

 Beginning in Year 1, the Corporations underwent a restructuring, whereby Z was formed
 as a single member limited liability company and elected to be treated as an S
 corporation. On Date 4, Z acquired a portion of the stock of Y. On Date 5, Z acquired a
 portion of the stock of each of W and X.

 In Year 2, Z’s member was informed that Z’s ownership caused the termination of the
 Corporations’ S corporation elections. Z’s member relied on its tax and legal advisors to
 take corrective action, but no action was taken.

 In Year 3, Z’s member was informed by a new tax advisor that the termination caused
 by the Year 1 restructuring had not been corrected. The Corporations then underwent a
 restructuring in Year 4 on Date 6, whereby Z acquired all of the stock of W and X and
 transferred the stock of Y to eligible S shareholders. Z also intends to elect to treat W
 and X as qualified subchapter S subsidiaries (QSub) under § 1361(b)(3)(B)(ii) of the
 Code and § 1.1361-3 of the Income Tax Regulations effective Date 6.

 The Corporations represent that the termination of the S corporation elections was
 inadvertent and was not the result of tax avoidance or retroactive tax planning. Further,
 the Corporations represent that no federal income tax return of Z’s member has been
 filed inconsistent with valid S corporation elections having been made for the
 Corporations effective Date 1, Date 2 and Date 3. The Corporations and their
 shareholders also represent that they will agree to any adjustments consistent with the
 treatment of the Corporations as S corporations as a condition of obtaining relief that
 may be required by the Secretary.

 LAW AND ANALYSIS

 Section 1362(f) provides that if (1) an election under § 1362(a) or § 1361(b)(3)(B)(ii) by
 any corporation (A) was not effective for the taxable year for which made (determined
 without regard to § 1362(b)(2)) by reason of a failure to meet the requirements of
 § 1361(b) or to obtain shareholder consents, or (B) was terminated under § 1362(d)(2)
 or (3) or § 1361(b)(3)(C), (2) the Secretary determines that the circumstances resulting
 in such ineffectiveness or termination were inadvertent, (3) no later than a reasonable
PLR-127266-18                                3

period of time after discovery of the circumstances resulting in the ineffectiveness or
termination, steps were taken (A) so that the corporation for which the election was
made or the termination occurred is a small business corporation or a qualified
subchapter S subsidiary, as the case may be, or (B) to acquire the required shareholder
consents, and (4) the corporation for which the election was made or 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 or a qualified
subchapter S subsidiary, as the case may be) as may be required by the Secretary with
respect to such period, then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such corporation shall be treated as an S corporation or
a qualified subchapter S subsidiary, as the case may be during the period specified by
the Secretary.

Based solely on the facts submitted and representations made, we conclude that Z’s
ownership caused inadvertent terminations of the Corporations’ S corporation elections
within the meaning of § 1362(f). We further hold that pursuant to the provisions of
§ 1362(f), W, X and Y will be treated as S corporations effective Date 1, Date 2 and
Date 3, respectively, and continuing thereafter, provided the Corporations’ S corporation
elections were valid and provided that the elections were not otherwise terminated
under § 1362(d). If W, X and Y or their shareholders fail to treat themselves as
described above, this ruling is null and void.

Except as specifically ruled above, we express no opinion concerning the federal tax
consequences of any aspect of the transactions described above. Specifically, no
opinion is expressed regarding Z’s or the Corporations' eligibility to be S corporations.
In addition, no opinion is expressed as to whether W and X are eligible to elect to be
treated as QSubs. Finally, no opinion is expressed as to whether any of the
Corporations’ shareholders are permissible shareholders for purposes of
§ 1361(b)(1)(B).
PLR-127266-18                               4

This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent. Pursuant to a power of
attorney on file, a copy of this letter is being sent to W’s, X’s and Y’s authorized
representative.


                                                Sincerely,

                                                Associate Chief Counsel


                                                ______________________________
                                                Richard T. Probst
                                                Senior Technician Reviewer, Branch 3
                                                Office of Associate Chief Counsel
                                                (Passthroughs & Special Industries)



Enclosures (2)

Copy of letter
Copy of letter for § 6110 purposes