IRS grants relief for late entity-classification and S corporation elections

Plain-English summary

An eligible entity intended to be classified as a corporation and taxed as an S corporation from the same effective date, but it did not timely file either Form 8832 or Form 2553. It asked for an extension under Treas. Reg. § 301.9100-3 for the entity-classification election and reasonable-cause relief under § 1362(b)(5) for the S election. The IRS found that the entity met the regulatory requirements for an extension and had reasonable cause for missing the S election deadline. It gave the entity 120 days from the letter date to file both forms, with copies of the ruling, for the elections to receive the intended effective date. The IRS did not decide whether the entity otherwise qualified as a small business corporation under § 1361(b).

Ruling snapshot

• Question: Could the entity make late elections to be classified as a corporation and then treated as an S corporation from its intended effective date?
• Outcome: approved (both elections receive the intended effective date if the required forms are filed within 120 days)
• Key authorities: IRC §§ 1361(b), 1362(a), 1362(b)(1), 1362(b)(3), 1362(b)(5); Treas. Reg. §§ 301.7701-3, 301.9100-1, 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                    Department of the Treasury
                                                             Washington, DC 20224

Number: 202051010                                            Third Party Communication: None
Release Date: 12/18/2020                                     Date of Communication: Not Applicable
Index Number: 1362.01-03, 9100.31-00                         Person To Contact:
                                                             ------------------------, ID No. -----------------
 -----------------------------------------                   Telephone Number:
 -------------------                                         ---------------------
 -------------------------------                             Refer Reply To:
 ----------------------------------------                    CC:PSI:B03
                                                             PLR-126648-19
                                                             Date:
                                                             September 23, 2020




LEGEND

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

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

Date1 =          -----------------------

Date2 =          ----------------------



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

       This letter responds to a letter dated August 5, 2019, and subsequent
correspondence, submitted on behalf of X, requesting an extension of time under
§ 301.9100-3 of the Procedure and Administration Regulations to file an election under
§ 301.7701-3 to be treated as an association taxable as a corporation for federal tax
purposes, and relief to file a late S corporation election under § 1362(b)(5) of the
Internal Revenue Code (“Code”).

                                                     FACTS

        The information submitted states that X is an eligible entity that was formed on
Date1 under the laws of State. X intended to elect to be treated as an association
taxable as a corporation and to elect to be treated as an S corporation for federal tax
purposes, with both elections effective Date2. However, X failed to properly and timely
file Form 8832, Entity Classification Election, and Form 2553, Election by a Small
Business Corporation.


                                             LAW AND ANALYSIS
PLR-126648-19                                  2


        Section 301.7701-3(a) provides that a business entity that is not classified as a
corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) (an eligible entity) can
elect its classification for federal tax purposes. Elections are necessary only when an
eligible entity does not want to be classified under its default classification or when an
eligible entity chooses to change its classification.

         Section 301.7701-3(b)(1) provides that, unless the entity elects otherwise, a
domestic eligible entity is (i) a partnership if it has two or more members; or
(ii) disregarded as an entity separate from its owner if it has a single owner.

        Section 301.7701-3(c)(1)(i) provides that an eligible entity may elect to be
classified other than as provided under § 301.7701-3(b) by filing Form 8832 with the
appropriate service center. Under § 301.7701-3(c)(1)(iii), this election will be effective
on the date specified by the entity on Form 8832 or on the date filed if no such date is
specified. The date specified on Form 8832 cannot be more than 75 days prior to the
date on which the election is filed.

       Section 301.9100-1(c) provides that the Commissioner may grant a reasonable
extension of time to make a regulatory election, or a statutory election (but no more than
6 months except in the case of a taxpayer who is abroad), under all subtitles of the
Code except subtitles E, G, H, and I. Section 301.9100-1(b) provides that the term
“regulatory election” includes an election whose due date is prescribed by a regulation
published in the Federal Register.

       Sections 301.9100-1 through 301.9100-3 provide the standards the
Commissioner will use to determine whether to grant an extension of time to make the
election. Section 301.9100-2 provides the rules governing automatic extensions of time
for making certain elections. Section 301.9100-3 provides the standards the
Commissioner will use to determine whether to grant an extension of time for regulatory
elections that do not meet the requirements of § 301.9100-2.

        Under § 301.9100-3, a request for relief will be granted when the taxpayer
provides the evidence (including affidavits described in § 301.9100-3(e)) to establish to
the satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good
faith, and (2) the grant of relief will not prejudice the interests of the Government.

      Section 1362(a) provides that a small business corporation may elect to be an S
corporation.

       Section 1362(b) provides the rule on when an S election will be effective.
Section 1362(b)(1) provides in relevant part that if an S election is made within the first
two and one-half months of a corporation’s taxable year, then the corporation will be
treated as an S corporation for the year in which the election is made. Under
§ 1362(b)(3), however, if an S election is made after the first two and one-half months of
PLR-126648-19                                  3

a corporation’s taxable year, then that corporation will not be treated as an S
corporation until the taxable year after the year in which the S election is filed.

       Section 1362(b)(5) provides that if: (A) an election under § 1362(a) is made for
any taxable year after the date prescribed by § 1362(b) for making such election for
such taxable year or no such election is made for any taxable year, and (B) the
Secretary determines that there was reasonable cause for the failure to timely make
such election, then the Secretary may treat such an election as timely made for such
taxable year.

                                       CONCLUSION

        Based solely on the information submitted and the representations made, we
conclude that X has satisfied the requirements of §§ 301.9100-1 and 301.9100-3. As a
result, X is granted an extension of time of 120 days from the date of this letter to file a
Form 8832 with the appropriate service center and elect to be treated as an association
taxable as a corporation for federal tax purposes, effective Date2. A copy of this letter
should be attached to the Form 8832.

       In addition, based solely on the facts submitted and the representations made,
we conclude that X has established reasonable cause for failing to make a timely
election to be an S corporation effective Date2. Accordingly, provided that X makes an
election to be an S corporation by filing a completed Form 2553 effective Date2, along
with a copy of this letter, with the appropriate service center within 120 days from the
date of this letter, then such election will be treated as timely made for Date2.

       Except as expressly provided herein, we express or imply no opinion concerning
the federal income tax consequences of the facts described above under any other
provision of the Code, including whether X was or is a small business corporation under
§ 1361(b) of the Code.

      This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.

       The rulings contained in this letter are based on 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.
PLR-126648-19                               4

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

                                     Sincerely,

                                     Associate Chief Counsel
                                     (Passthroughs & Special Industries)



                                     _______________________________________
                                     Adrienne M. Mikolashek
                                     Branch Chief, Branch 3
                                     Office of Associate Chief Counsel
                                     (Passthroughs & Special Industries)

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



cc: