Inadvertent invalid S corporation election fixed where the wrong spouse signed the consent

Plain-English summary

To be an S corporation, a company must file Form 2553 and every shareholder must consent to the election. Here, the company was wholly owned by one spouse (Spouse A), but on the Form 2553 the other spouse (Spouse B), who was not a shareholder, signed the consent instead. Because the actual owner never consented, the S election was invalid from the start. The company represented that the mistake was inadvertent and that it had filed all its returns as if it were a valid S corporation. Under § 1362(f), the IRS can treat an S election that was ineffective for lack of a required consent as valid if the defect was inadvertent, was corrected within a reasonable time, and the parties agree to any adjustments. The IRS concluded the defect was inadvertent and ruled that the company will be treated as an S corporation from the intended effective date, provided the correct owner (Spouse A) signs a proper consent statement within 120 days.

Ruling snapshot

• Question: Was the company's S corporation election an inadvertent invalid election under § 1362(f) where a non-shareholder spouse signed the consent, and can it be treated as a valid S corporation?
• Outcome: Approved (treated as an S corporation from the intended date, contingent on the true owner filing a proper consent within 120 days).
• Key authorities: IRC §§ 1361(a), (b), 1362(a), (f); Treas. Reg. § 1.1362-6(b)(1).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202205018 Third Party Communication: None
Release Date: 2/4/2022 Date of Communication: Not Applicable
Index Number: 1362.00-00
Person To Contact:
--------------------------------------------- ------------------------, ID No. -----------------
---------------------------------- Telephone Number:
--------------------------------------- --------------------
--------------------------- Refer Reply To:
--------------------------- CC:PSI:B01
PLR-112403-21
Date:
November 01, 2021

                                        LEGEND

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

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

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

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

Spouse A = ------------------------
-------------------------

Year 1 = -------

Spouse B: = --------------------

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

This letter responds to a letter dated June 8, 2021, submitted on behalf of X by its
authorized representatives, requesting relief under § 1362(f) of the Internal Revenue
Code (Code).

                                                Facts

The information submitted discloses that X was formed under the laws of State on Date
1 and made an election to be treated as an S corporation effective Date 2. On Date 2, X
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was wholly owned by Spouse A. In Year 1, X learned that Spouse B and not Spouse A
consented to X’s S corporation election on its Form 2553, Election by a Small Business
Corporation. Therefore, X's S corporation election was ineffective.

X represents that the circumstances surrounding X’s ineffective S corporation election
were inadvertent and unintended. X and its shareholder further represent that they have
filed all returns consistent with X having a valid S corporation election in effect as of
Date 2. X and its shareholder have agreed to make any adjustments that the
Commissioner may require, consistent with treatment of X as an S corporation.

                               Law and Analysis

Section 1361(a)(1) provides that the term “S corporation” means, with respect to any
taxable year, a small business corporation for which an election under § 1362(a) is in
effect for the year.

Section 1361(b)(1) defines a “small business corporation” as a domestic corporation
which is not an ineligible corporation and which does not (A) have more than 100
shareholders, (B) have as a shareholder a person (other than an estate, a trust
described in § 1361(c)(2), or an organization described in § 1361(c)(6)) who is not an
individual, (C) have a nonresident alien as a shareholder, and (D) have more than 1
class of stock.

Section 1362(a)(1) provides that, except as provided in § 1362(g), a small business
corporation may elect, in accordance with the provisions of § 1362, to be an S
corporation.

Section 1362(a)(2) provides that an S corporation election shall be valid only if all
persons who are shareholders in such corporation on the day on which such election is
made consent to such election.

Section 1362(f) provides that if (1) an election under § 1362(a) 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 paragraph (2) or (3) of § 1362(d); (2)
the Secretary determines that the circumstances resulting in such ineffectiveness or
termination were inadvertent; (3) no later than a reasonable period of time after
discovery of the circumstances resulting in such ineffectiveness or termination, steps
were taken (A) so that the corporation is a small business corporation, or (B) to acquire
the required shareholder consents, and (4) the corporation, and each person who was a
shareholder of the corporation at any time during the period specified pursuant to
§ 1362(f), agrees to make such adjustments (consistent with the treatment of the
corporation as an S corporation) as may be required by the Secretary with respect to
such period, then, notwithstanding the circumstances resulting in such ineffectiveness
PLR-112403-21 3

or termination, the corporation shall be treated as an S corporation during the period
specified by the Secretary.

                                    Conclusion

Based solely on the facts submitted and the representations made, we conclude that
X’s S corporation election was ineffective on Date 2 because Spouse A failed to
consent to X’s S corporation election. We further conclude that the ineffectiveness of
X’s S corporation election constituted an inadvertent invalid election within the meaning
of § 1362(f). Consequently, under § 1362(f), we rule that X will be treated as an S
corporation from Date 2 and thereafter, provided, that X’s S corporation election was
otherwise valid and not otherwise terminated under § 1362(d).

This ruling is contingent on Spouse A signing a written statement as described in
§ 1.1362-6(b)(1) consenting to X’s S corporation election effective Date 2. The written
statement must be filed with the appropriate service center within 120 days from the
date of this letter, indicating that the statement is to be associated with X’s
originally filed Form 2553.

Except as specifically ruled above, we express or imply no opinion as to the federal
income tax consequences of the facts described above under any other provision of the
Code. Specifically, no opinion is expressed concerning whether X is a subchapter S
corporation for federal income tax purposes.

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 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-112403-21 4

Pursuant to the power of attorney on file with this office, we are sending a copy of this
letter to X's authorized representatives.

                                      Sincerely,

                                      /s/ Jennifer N. Keeney

                                       Jennifer N. Keeney
                                       Senior Counsel, Branch 1
                                       Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)

Enclosure
Copy for § 6110 purposes

cc: