S corporation relief granted after election was signed before incorporation

Plain-English summary

A corporation's sole original shareholder signed Form 2553 before the corporation was legally incorporated, making its intended S corporation election ineffective. The corporation nevertheless filed returns as an S corporation, and its shareholders reported consistently with that treatment. The shareholders later contributed their stock to a successor corporation in a transaction represented to be an F reorganization. The IRS found that the invalid election was inadvertent and ruled that the original corporation and its successor would be treated as S corporations from the actual incorporation date forward. The relief depends on the election otherwise being valid and not later terminating, and the IRS did not rule on the validity of the F reorganization.

Ruling snapshot

• Question: Could an S corporation election signed before incorporation be treated as effective from the incorporation date for the corporation and its successor?
• Outcome: approved as inadvertent invalid-election relief
• Key authorities: IRC §§ 1361, 1362(f), 368(a)(1)(F); Rev. Rul. 2008-18

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202419012                                             Third Party Communication: None
 Release Date: 5/10/2024                                       Date of Communication: Not Applicable
 Index Number: 1362.04-00
                                                               Person To Contact:
 ------------------------------                                -----------------------------, ID No. -------------
 ---------------------------                                   -----------------
 ------------------------------                                Telephone Number:
 ----------------------                                        --------------------
 -----------------------------------------------------         Refer Reply To:
                                                               CC:PSI:01
                                                               PLR-116490-23
                                                               Date:
                                                               February 15, 2024



LEGEND

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

 Y              =      -------------------------------------------------------------------------------------------
                       ------------------------------

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

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

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

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

 Date 3         =      -----------------
                       -------------------------------------------------------------------------------------------
 Date 4         =      ----------------------------


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

This letter responds to a letter dated July 27, 2023, and subsequent correspondence,
submitted on behalf of Y by its authorized representatives, requesting relief under
§ 1362(f) of the Internal Revenue Code.

FACTS

The information submitted states that X elected to be treated as an S corporation
effective Date 1. However, X was not incorporated under the laws of State until Date 3.
Additionally, A, X’s sole original shareholder, signed the Form 2553, Election by a Small

PLR-116490-23                               2

Business Corporation, on Date 2, a date preceding X’s incorporation. As a result, X’s S
corporation election was ineffective.

On Date 4, as part of what Y represents was a reorganization under § 368(a)(1)(F), X's
shareholders contributed all their stock in X to Y, thereby causing X to become a wholly
owned subsidiary of Y. Consistent with Rev. Rul. 2008-18, 2008-1 C.B. 674, Y was
treated as the successor S corporation to X for federal income tax purposes and
therefore did not make a new S corporation election.

Y, as X’s successor, represents that the circumstances surrounding X's ineffective S
corporation election were inadvertent and unintended. Y further represents that since
Date 3, X has filed all returns consistent with X's status as an S corporation and its
shareholders have filed consistent with X's status an S corporation. Additionally, Y and
its shareholders have agreed to make any adjustments required as a condition of
obtaining relief under § 1362(f) that the Commissioner may require, consistent with the
treatment of X and its successor Y 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(b)(1) provides that an election under § 1362(a) may be made by a small
business corporation for any taxable year (A) at any time during the preceding taxable
year, or (B) at any time during the taxable year and on or before the 15th day of the
third month of the taxable year.

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

PLR-116490-23                                 3

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
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 1 because X was not a small business
corporation until Date 3. 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, and Y as X’s successor, will
be treated as an S corporation from Date 3 and thereafter, provided, that the S
corporation election was otherwise valid and not otherwise terminated under § 1362(d).

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, we express or imply no opinion as to whether X or Y was or is,
respectively, otherwise eligible to be treated as an S corporation. Further, we express or
imply no opinion on the validity of the reorganization under § 368(a)(1)(F) and its tax
consequences.

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-116490-23                                                 4


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


                                                                  Sincerely,




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


Enclosure
      Copy of letter for § 6110 purposes




 cc: ---------------
     ----------------------------
     -------------------------------------------
     ---------------------------

      ---------------------
      ----------------------------
      -------------------------------------------
      ---------------------------

      ----------------------------------
      -----------------------------------------------------
      ----------------------------------------
      -------