New owner gets IRS consent to re-elect S corporation status inside the usual 5-year waiting period

Plain-English summary

A corporation had been an S corporation, but its S election terminated. Under
section 1362(g), once an S election is terminated, the corporation normally
cannot elect S status again for five years unless the IRS consents. After the
termination, a new owner acquired all of the corporation's stock (through a
disregarded entity) and wanted to elect S status again before the five-year
wait was up. The regulations say that when more than 50 percent of the stock is
held by people who did not own any stock on the termination date, that fact
tends to show the IRS should consent. Because the new owner had owned none of
the stock at termination, the IRS concluded the corporation met its burden and
consented to an early re-election, provided it files Form 2553 within 120 days.
The IRS expressed no opinion on whether the corporation is otherwise eligible to
be an S corporation.

Ruling snapshot

• Question: Should the IRS consent to a new S corporation election before the five-year waiting period under section 1362(g) expires?
• Outcome: Approved (consent granted; Form 2553 due within 120 days)
• Key authorities: IRC § 1362(g); IRC § 1362(a); Treas. Reg. § 1.1362-5(a)

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202330009                                              Third Party Communication: None
 Release Date: 7/28/2023                                        Date of Communication: Not Applicable
  1362.00-00, 1362.01-02
                                                                Person To Contact:
 ------------------------                                       ------------------------, ID No. -----------------
 ------------------------------------------------------------   Telephone Number:
 -------                                                        --------------------
 --------------------------                                     Refer Reply To:
 ----------------------------                                   CC:PSI:01
 -----------------------------------                            PLR-122176-22
                                                                Date:
                                                                May 02, 2023




                                                    LEGEND


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

 Y                         ---------------------------------------------------------------------------------------
                           ----------------------------------

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

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

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

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

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

 Date 6         =          ----------------------

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

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

Dear -----------:
PLR-122176-22                                 2

This responds to a letter dated November 2, 2022, and subsequent correspondence,
submitted on behalf of X by its authorized representative, requesting a ruling under
§ 1362(g) of the Internal Revenue Code (the Code).

                                          FACTS

X was formed in State on Date 1 and elected to be treated as an S corporation effective
Date 2. X’s S corporation election terminated effective Date 3. A, through his
disregarded entity, Y, acquired all the interests in X in two stock acquisitions—one on
Date 4 and the other on Date 5. As of the date of the termination of X’s S corporation
election, A was not an owner. X now requests permission to be an S corporation,
effective Date 6. Date 6 is prior to the expiration of the five-year waiting period imposed
by § 1362(g).

                                           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(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 that absent the
Commissioner's consent, an S corporation whose election has terminated (or a
successor corporation) may not make a new election under § 1362(a) for five taxable
years as described in § 1362(g). However, the Commissioner 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. 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.

                                      CONCLUSION

Based solely on the facts submitted and representations made, we conclude that
X has met its burden under § 1.1362-5(a). We grant permission for X to re-elect to be
PLR-122176-22                                  3

an S corporation effective Date 6. Accordingly, provided that X makes an election to be
an S corporation by filing a completed Form 2553 with the appropriate service center
effective Date 6 within 120 days following the date of this letter, then such election will
be treated as timely made for X's taxable year beginning Date 6. A copy of this letter
should be attached to the Form 2553.

Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, no opinion is expressed regarding whether X is
otherwise eligible to be an S corporation.

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.

This ruling is directed only to the taxpayer that requested 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 with this office, a copy of this letter is
being sent to your authorized representative.

                                                   Sincerely,


                                                   Caroline E. Hay
                                                   Caroline E. Hay
                                                   Senior Technician Reviewer, Branch 1
                                                   Office of the Associate Chief Counsel
                                                   (Passthroughs and Special Industries)


Enclosure
Copy for § 6110 purposes




cc: