Consent granted to reelect S corporation status before the five-year waiting period, and to treat it as timely

Plain-English summary

When a corporation's S election is terminated, section 1362(g) generally bars it from electing S status again for five years unless the IRS consents. Here a company's S election ended when its sole shareholder transferred some shares to an ineligible shareholder, which disqualified the company as a small business corporation. Later, an unrelated, eligible individual bought out both prior shareholders and became the sole owner. The company asked the IRS to consent to a new S election before the five-year wait was over, and to treat that election as timely under section 1362(b)(5). The IRS found that the event causing the termination was not reasonably within the control of the company or its substantial shareholders and was not part of a plan to terminate, and that there was reasonable cause for the late election, so it consented to a new S election effective the requested date, provided the company files Form 2553 within 120 days. This matters to companies that lost S status through an event outside their control and want to restore it without waiting the full five years.

Ruling snapshot

• Question: Will the IRS consent under § 1362(g) to a new S election before the five-year waiting period, and treat it as timely under § 1362(b)(5)?
• Outcome: Approved (consent and reasonable-cause relief granted; file Form 2553 within 120 days)
• Key authorities: IRC §§ 1362(g) and 1362(b)(5); Treas. Reg. § 1.1362-5(a)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202240002 Third Party Communication: None
Release Date: 10/7/2022 Date of Communication: Not Applicable
Index Number: 1362.01-02, 1362.01-03
Person To Contact:
----------------------------------------- ----------------------, ID No. -----------------
------------------------------------------- Telephone Number:
------------------------- --------------------
--------------------------- Refer Reply To:
----------------------------- CC:PSI:B01
PLR-101372-22
Date:
July 08, 2022

                                              Legend

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

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

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

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

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

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

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

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

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

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

n = -------

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

This letter responds to a letter dated January 3, 2022, and subsequent correspondence,
submitted on behalf of Company by its authorized representatives, requesting rulings
under sections 1362(g) and 1362(b)(5) of the Internal Revenue Code (Code).
PLR-101372-22 2

                                       Facts

According to the information submitted, Company was incorporated in State and elected
to be treated as an S corporation effective Date 1. On Date 2, Company’s sole
shareholder, A, transferred n% of A’s Company shares to X, an ineligible shareholder,
resulting in the termination of Company's S corporation election. On Date 3, B acquired
the remaining Company shares still held by A, and on Date 4, B acquired the Company
shares then held by X. Following these acquisitions, B was the sole shareholder of
Company.

Company represents that B is a U.S. resident individual and, therefore, an eligible
shareholder of an S corporation. Company further represents that B is unrelated to A
and X. Company is requesting permission to reelect to be an S corporation effective
Date 5, prior to the termination of the five-year waiting period imposed by section
1362(g). Company is also requesting that the election be treated as timely made under
section 1362(b)(5).

                                        Law

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)(2)(A) provides that an election under section 1362(a) shall be
terminated whenever (at any time on or after the 1st day of the 1st taxable year for
which the corporation is an S corporation) such corporation ceases to be a small
business corporation.

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, in part, that 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. In the absence of this fact, consent ordinarily is denied
unless the corporation shows that the event causing termination was not reasonably
within the control of the corporation or shareholders having a substantial interest in the
corporation and was not part of a plan on the part of the corporation or of such
shareholders to terminate the election.
PLR-101372-22 3

Section 1362(b)(5) of the Code 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, the Secretary may treat such an election as timely made for such taxable
year.

                                    Conclusion

Based solely on the facts and the representations submitted, we conclude that the
events causing the termination of Company's S corporation election were not
reasonably within the control of the corporation or shareholders having a substantial
interest in the corporation and were not part of a plan on the part of the corporation or of
such shareholders to terminate the election. Therefore, consent is granted for Company
to make an election to be an S corporation effective Date 5.

In addition, Company has established reasonable cause for failing to make a timely
election 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 with the
appropriate service center campus, 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 specifically set forth above, no opinion is expressed concerning the federal
tax consequences of the facts described above under any other provision of the Code.
No opinion is expressed or implied regarding Company's eligibility to elect to be an S
corporation.

A copy of this letter should be attached to Company's federal income tax return for its
taxable year for which the S corporation election is accepted as timely filed. A copy of
this letter is being sent to Company for that purpose.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the
Code 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.
PLR-101372-22 4

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

                                  Sincerely,



                                  _______________________________
                                  Laura C. Fields
                                  Branch Chief, Branch 1
                                  (Passthroughs & Special Industries)

Enclosure (1)
Copy of this letter for §6110 purposes

cc: