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Learn how to make an S Election that was note made timely
What it does: These Procedures will provide a method for you to
have the IRS process your application. Processing the application
does not mean your application will be accepted.
Why it works:
There are two separate and distinct sets of procedures to follow whenever the election for the S Corporation Status is late or failed. One method is to obtain a private letter ruling from the Service and the other is to follow Revenue Procedure 98-55. If the second method (Rev Proc 98-55 applies it is by far the most simple).
When relief for a failure to make timely S corporation election is available without a private letter ruling.
IRS has provided procedures for requesting relief for a failure to make a timely S corporation election without asking for a private letter ruling where the corporation did not qualify as an S corporation because it failed to file a Form 2553 (S corporation election) if (1) the due date for the tax return of the corporation (excluding extensions) for the first tax year the corporation intended to be an S corporation has not passed and (2) the corporation has reasonable cause for its failure to make a timely election.
For a quick summary see the quick summary section:
|
A Few Timelines for the Late 2553 |
| An election made after the due date will be accepted as timely filed if the corporation can show that the failure to file on time was due to reasonable cause. To request relief for a late election, the corporation generally must request a private letter ruling and pay a user fee in accordance with Rev. Proc. 99-1, 1999-1 I.R.B. 6 (or its successor). But if the election is filed within 12 months of its due date and the original due date for filing the corporation's initial Form 1120S has not passed, the ruling and user fee requirements do not apply. To request relief in this case, write FILED PURSUANT TO REV. PROC. 98-55 at the top of page 1 of Form 2553, attach a statement explaining the reason for failing to file the election on time, and file Form 2553 as otherwise instructed. See Rev. Proc. 98-55 for more details. |
For Actions You Must Complete See the Actions Section
Ordinarily, this paper does not accompany a form 2553. The election process is a very simple procedure and requires no explanation, warnings, or support of the advice or services provided. However, in this instance there is a problem with the election process. It was not completed within time limited prescribed by law. Those time limits provide that an election can be made at the following times:
The date has expired for making the election for all those dates.
Therefore — the procedures for making the election has become vulnerable to Internal Revenue Service denial, and therefore requires me to communicate more fully to you.
Included herewith are three copies of the revised form 2553.
| If the corporation's principal business, office, or agency is located in : | Use the following Internal Revenue Service Center address or fax number : |
| New Jersey, New York (New York City and counties of Nassau, Rockland, Suffolk, and Westchester) | Holtsville, NY 00501 (516) 654-6954 |
| New York (all other counties), Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont | Andover, MA 05501 (978) 474-5633 |
| Florida, Georgia, South Carolina | Atlanta, GA 39901 |
| (770) 455-2169 | |
| Indiana, Kentucky, Michigan, Ohio, West Virginia | Cincinnati, OH 45999 (606) 292-5289 |
| Kansas, New Mexico, Oklahoma, Texas | Austin, TX 73301 (512) 460-4046 |
| Alaska, Arizona, California (counties of Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Glenn, Humboldt, Lake, Lassen, Marin, Mendocino, Modoc, Napa, Nevada, Placer, Plumas, Sacramento, San Joaquin, Shasta, Sierra, Siskiyou, Solano, Sonoma, Sutter, Tehama, Trinity, Yolo, and Yuba), Colorado, Idaho, Montana, Nebraska, Nevada, North Dakota, Oregon, South Dakota, Utah, Washington, Wyoming | Ogden, UT 84201 (801) 620-7155 |
| California (all other counties), Hawaii | Fresno, CA 93888 |
| (559) 443-5030 | |
| Illinois, Iowa, Minnesota, Missouri, Wisconsin | Kansas City, MO 64999 (816) 823-1975 |
| Alabama, Arkansas, Louisiana, Mississippi, North Carolina, Tennessee | Memphis, TN 37501 (901) 546-3900 |
| Delaware, District of Columbia, Maryland, Pennsylvania, Virginia | Philadelphia, PA 19255 (215) 516-3414 |
When to make the election. Complete and file Form 2553 (a) at any time before the 16th day of the 3rd month of the tax year, if filed during the tax year the election is to take effect, or (b) at any time during the preceding tax year. An election made no later than 2 months and 15 days after the beginning of a tax year that is less than 2 months long is treated as timely made for that tax year. An election made after the 15th day of the 3rd month but before the end of the tax year is effective for the next year. For example, if a calendar tax year corporation makes the election in April 2000, it is effective for the corporation's 2001 calendar tax year.
Risks
Please understand that all the following risks are real. I have prepared the form for the election as an S Corporation. As you will recollect, I have asked about the status of the form on several occasions. As you and I discovered together when we asked for a copy of the form for your files and this firm’s files — no copy was available and you and I discovered that in fact the election had not been made. The time for making the election has long past. I am requesting the Internal Revenue Service to approve the election under a special provision for untimely elections. The Internal Revenue Service has the authority to deny the request simply because the original form was not filed timely. The special provision I am requesting is a part of the tax law enacted in 1996, which provides for relief of denial because of late elections (forms 2553). The following are the risks I want you and the other shareholders to be aware of:
Quick summary
The Internal Revenue Service can deny this election; If the Internal Revenue Service does choose to oppose you on this, we will work for you and refute any denial. The Internal Revenue Service can choose on its own initiative to deny the election for 1997 and prevent you using the election until 1998. We will make rebuttals to any such action.
The election will position the corporation so that the loss or the income will be shown on your individual return based on the number of share that you hold as a portion of the total shares outstanding.
The amount of the loss that the Internal Revenue Service will allow on your individual return will be limited to amount of checks that you have written to the corporation. The checks written to the corporation can be for the purchase of stock or for your own individual money you are loaning to the corporation. Money borrowed from a bank (or other lender) which shows the corporation as the borrower will not be added to the checks you write from your personal funds.
Actions Section
S Corporation Election – Technical Section
Introduction
This portion is, although technical in its scope, an analysis of the process of making this election. Please read the warnings in the first portion of this document.
In addition, I am including as end notes quotations from various authorities including the actual language and excerpts from the tax law itself.
The procedures for the election are not difficult, tedious, or elaborate. The are methodical. There are specific dates, which must be complied with. Because of legislation in 1996, the failure to comply fully with the dates has been granted some relief by Congress. However, when a taxpayer must confront the Internal Revenue Service the paperwork issues and rebuttals can be quite lengthy.
Acceptance or Nonacceptance of Election.—
The service center will notify the corporation if its election is accepted and when it will take effect. The corporation will also be notified if its election is not accepted. The corporation should generally receive a determination on its election within 60 days after it has filed Form 2553. If box Q1 in Part II is checked on page 2, the corporation will receive a ruling letter from the IRS in Washington, DC, that either approves or denies the selected tax year. When box Q1 is checked, it will generally take an additional 90 days for the Form 2553 to be accepted.
Care should be exercised to ensure that the IRS receives the election. If the corporation is not notified of acceptance or nonacceptance of its election within 3 months of date of filing (date mailed), or within 6 months if box Q1 is checked, take follow-up action by corresponding with the service center where the corporation filed the election. If the IRS questions whether Form 2553 was filed, an acceptable proof of filing is (a) certified or registered mail receipt (timely filed); (b) Form 2553 with accepted stamp; (c) Form 2553 with stamped IRS received date; or (d) IRS letter stating that Form 2553 has been accepted.
Shareholders’ Consent
Statement.—Each shareholder who owns (or is K, page 1, of Form 2553. See section 1361(c)(2).
Name and address of each shareholder; shareholder’s spouse having a community property interest in the corporation’s stock; and each tenant in common, joint tenant, and tenant by the entirety. (A husband and wife (and their estates) are counted as one shareholder in determining the number of shareholders without regard to the manner in which the stock is owned.)
This document is intended to cover only a portion of the election process and none of the tax effects of the S Corporation election. Therefore know that this writing is not exhaustive.
I am inlcuding as end notes to this document Revenue Procedure 97-40 which was published in the Internal Revenue Bulletin 50, 1997-33. I am also including a portion of the Federal Law pertinent to the election as an S Corporation. This reason for the inclusion is the citing of the authoritative documents used in the cover letter for the form 2553, which has been drafted by this office.
Please note our temporary location for contact. We sincerely appreciate your continued support and look forward to seeing you soon:
Bob Parrish CPA
Bob Parrish
Voice: 941/387-0926; 915/367-3465
Fax: 941/387-0823
E-Mail: BMSarasota@home.com BMOdessa@home.com pro1040@home.com
Law (commentary and citation)
Regs (commentary and citation)
Cases (commentary and citation)
S Corporation Election – Technical Section
Introduction
This portion is, although technical in its scope, an analysis of the process of making this election. Please read the warnings in the first portion of this document.
In addition, I am including as end notes quotations from various authorities including the actual language and excerpts from the tax law itself.
The procedures for the election are not difficult, tedious, or elaborate. The are methodical. There are specific dates, which must be complied with. Because of legislation in 1996, the failure to comply fully with the dates has been granted some relief by Congress. However, when a taxpayer must confront the Internal Revenue Service the paperwork issues and rebuttals can be quite lengthy.
Acceptance or Nonacceptance of Election.—
The service center will notify the corporation if its election is accepted and when it will take effect. The corporation will also be notified if its election is not accepted. The corporation should generally receive a determination on its election within 60 days after it has filed Form 2553. If box Q1 in Part II is checked on page 2, the corporation will receive a ruling letter from the IRS in Washington, DC, that either approves or denies the selected tax year. When box Q1 is checked, it will generally take an additional 90 days for the Form 2553 to be accepted.
Care should be exercised to ensure that the IRS receives the election. If the corporation is not notified of acceptance or nonacceptance of its election within 3 months of date of filing (date mailed), or within 6 months if box Q1 is checked, take follow-up action by corresponding with the service center where the corporation filed the election. If the IRS questions whether Form 2553 was filed, an acceptable proof of filing is (a) certified or registered mail receipt (timely filed); (b) Form 2553 with accepted stamp; (c) Form 2553 with stamped IRS received date; or (d) IRS letter stating that Form 2553 has been accepted.
Shareholders’ Consent
Statement.—Each shareholder who owns (or is K, page 1, of Form 2553. See section 1361(c)(2).
Name and address of each shareholder; shareholder’s spouse having a community property interest in the corporation’s stock; and each tenant in common, joint tenant, and tenant by the entirety. (A husband and wife (and their estates) are counted as one shareholder in determining the number of shareholders without regard to the manner in which the stock is owned.)
This document is intended to cover only a portion of the election process and none of the tax effects of the S Corporation election. Therefore know that this writing is not exhaustive.
I am inlcuding as end notes to this document Revenue Procedure 97-40 which was published in the Internal Revenue Bulletin 50, 1997-33. I am also including a portion of the Federal Law pertinent to the election as an S Corporation. This reason for the inclusion is the citing of the authoritative documents used in the cover letter for the form 2553, which has been drafted by this office.
We sincerely appreciate your continued support and look forward to seeing you soon:
Bob Parrish CPA
Bob Parrish
Commentary
There are two separate and distinct sets of procedures to follow whenever the election for the S Corporation Status is late or failed. One method is to obtain a private letter ruling from the Service and the other is to follow Revenue Procedure 98-55. If the second method (Rev Proc 98-55 applies it is by far the most simple).
When relief for a failure to make timely S corporation election is
available without a private letter ruling.
IRS has provided procedures for requesting relief for a failure to make a timely S
corporation election without asking for a private letter ruling where the corporation did
not qualify as an S corporation because it failed to file a Form 2553 (S corporation
election) if (1) the due date for the tax return of the corporation (excluding extensions)
for the first tax year the corporation intended to be an S corporation has not passed and
(2) the corporation has reasonable cause for its failure to make a timely election. 2
2 Rev Proc 98-55, 1998-46 IRB 27.
Under these procedures, relief is available if a completed election form is filed with the
applicable service center within 12 months of the original due date for the election and
by the due date of the tax return (excluding extensions) for the first year the
corporation intended to be an S corporation. The Form 2553 must be signed by all persons
who were shareholders at any time from the first day of the first tax year for which the
election is to be effective until the date it is made, must state at the top "FILED
PURSUANT TO REV. PROC. 98-55," and must have an attached statement explaining the
reason for the failure to file. All persons whose consent is required for the S
corporation election must sign the Form 2553. 3
3 Rev Proc 98-55, 1998-46 IRB 27.
The procedures also apply (1) where the corporation failed to qualify as an S corporation
because of both a failure to file a timely Form 2553 and a failure of a trust shareholder
to elect qualified Subchapter S trust (QSST) or electing small business trust (ESBT)
status and (2) where, in addition to the corporation's failure to file a timely Form 2553
its subsidiary corporation failed to qualify as a qualified subchapter S subsidiary (QSub)
on the first day of the parent corporation's first taxable year as an S corporation solely
because a proper QSub election was not timely filed. 4
4 Rev Proc 98-55, 1998-46 IRB 27.
Where there were both failures to elect S corporation status and QSST, ESBT, or QSub
status, the relevant ESBT, QSST, or QSub elections must accompany the Form 2553. The Form
2553 and the accompanying elections must state at the top of the document "FILED
PURSUANT TO REV. PROC. 98-55" and the corporation must attach to the Form 2553 a
statement explaining the reason for the failure to file a timely S corporation election. 5
5 Rev Proc 98-55, 1998-46 IRB 27.
Where a timely S corporation election is filed, but a trust shareholder failed to file a
QSST election, automatic relief is available as described at ¶ 61,113. Where a timely S
corporation election is filed, but a trust shareholder failed to file a ESBT election,
automatic relief is available as described at ¶ 61,116.6A. Where a trust that qualifies
for either of those relief procedures acquired shares after the first day on which the
corporation intended to be an S corporation, the request under those rules must be
attached to the Form 2553. The Form 2553 and the accompanying elections must state at the
top of the document "FILED PURSUANT TO REV. PROC. 98-55" and the corporation
must attach to the Form 2553 a statement explaining the reason for the failure to file a
timely S corporation election. 6
6 Rev Proc 98-55, 1998-46 IRB 27.
When IRS receives a request for relief, it will determine whether the requirements for
relief have been satisfied and will notify the corporation of its result. Where IRS grants
relief for the failure to file a Form 2553, it will also automatically grant relief for
the failure to file a QSST, ESBT, or QSub election. 7
7 Rev Proc 98-55, 1998-46 IRB 27.
For how to request relief where a timely S corporation election is filed, but an intended
QSub failed to file an election, see ¶ 61,105.2.
Before Rev Proc 98-55 (footnotes 1 through 7) was issued, relief was available under Rev
Proc 97-40, which applied where the failure to qualify for S corporation status was due
solely to a failure to make an S corporation election and required that a completed
election form be filed within six months of the original due date for the election. 8 Rev
Proc 98-55 applies to requests for relief outstanding at the time it was issued, including
requests filed under Rev Proc 97-40. 9
8 Rev Proc 97-40, 1997-33 IRB 50 superceded by Rev Proc 98-55, 1998-46
IRB 27.
9 Rev Proc 98-55, 1998-46 IRB 27.
§§§ Law §§§
§§§ Regs §§§
§§§ Cases §§§
§§§ Revenue Procedures §§§
Revenue Procedure 98-55 |
FULL TEXT This revenue procedure amplifies and supersedes the provisions of Rev. Proc. 94-23, 1994-1 C.B. 609, and Rev. Proc. 97-40, 1997-33 I.R.B. 50. This revenue procedure is intended to provide guidance for taxpayers requesting relief for late S corporation elections and certain untimely elections required to be filed by or with respect to an S corporation. Accompanying this document is a flowchart designed to aid taxpayers in applying this revenue procedure. SEC. 2. Background Section 1361(b)(1) defines a "small business corporation" as a domestic corporation that is not an ineligible corporation and that does not: (1) have more than 75 shareholders; (2) have as a shareholder a person (other than an estate, a trust described in section 1361(c)(2), or an organization described in section 1361(c)(6)) who is not an individual; (3) have a nonresident alien as a shareholder; and (4) have more than one class of stock. Section 1362(a)(1) provides that, except in a situation described in section 1362(g), a small business corporation may elect to be treated as an S corporation. Section 1362(b)(1) provides that the corporation may make an election to be treated as an S corporation (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 3rd month of the taxable year. Under section 1362(b)(3), if an S corporation election is made for a taxable year after the 15th day of the 3rd month of that taxable year and on or before the 15th day of the 3rd month of the following taxable year, then the S corporation election is treated as made for the following taxable year. Section 1362(b)(5) provides that if (A) an election under section 1362(a) is made for any taxable year (determined without regard to section 1362(b)(3)) after the date prescribed by section 1362(b) for making the election for the taxable year or no election is made for any taxable year, and (B) the Secretary determines that there was reasonable cause for the failure to timely make the election, the Secretary may treat the election as timely made for the taxable year (and section 1362(b)(3) shall not apply). Rev. Proc. 97-40 provides a special procedure to request relief for a late S corporation election. That revenue procedure applies only to a corporation (1) that has not filed a timely S corporation election under section 1362(a)(1), (2) for which an S corporation election is filed within 6 months of the original due date for the election, and (3) for which the due date of the tax return (excluding extensions) for the first year the corporation intended to be an S corporation has not passed. Rev. Proc. 97-48, 1997-43 I.R.B. 19, provides special procedures to obtain automatic relief for certain late S corporation elections in two situations. In both situations, relief is available only where the due date for the tax return for the first year the corporation intended to be an S corporation has passed and other eligibility requirements are met. Rev. Proc. 97-48 does not provide relief for late electing small business trust (ESBT), qualified subchapter S trust (QSST), or qualified subchapter S subsidiary (QSub) elections. Section 1362(f) grants the Service authority to provide relief in
situations where a corporation's S election was not effective for the taxable year for
which it was made by reason of a failure to meet the requirements of section 1361(b), or
where the corporation's S election terminates under section 1362(d)(2) or (3). A
corporation is eligible for relief under this provision if: If a corporation is eligible for relief under this provision, then, notwithstanding the circumstances resulting in the ineffectiveness or termination, the corporation will be treated as an S corporation during the period specified by the Secretary. Section 1.1362-4 of the Income Tax Regulations sets forth additional guidance regarding inadvertent termination relief. Section 1.1362-4(b) provides that the corporation has the burden of establishing that under the relevant facts and circumstances the Commissioner should determine that the termination was inadvertent. The fact that the terminating event was not reasonably within the control of the corporation and was not part of a plan to terminate the election, or the fact that the event took place without the knowledge of the corporation, notwithstanding its due diligence to safeguard against such an event, tends to establish that the termination was inadvertent. Section 1.1362-4(c) provides that a taxpayer may request inadvertent termination relief by submitting a request for a private letter ruling. Section 1.1362-4(d) provides that the Commissioner may condition the granting of a ruling request on any adjustments that are appropriate. Section 1.1362-4(e) requires the corporation and all persons who were shareholders of the corporation at any time during the time specified by the Commissioner to consent to any adjustments that the Commissioner may require. Section 1361(d)(1)(A) provides that in the case of a QSST with respect to which a beneficiary makes an election under section 1361(d)(2), the trust will be treated as a trust described in section 1361(c)(2)(A)(i) (relating to trusts that may be a shareholder of a small business corporation under section 1361(b)(1)). Pursuant to section 1361(d)(2)(A) and section 1.1361-1(j)(6)(i), the election by a current income beneficiary of a QSST may be made by the beneficiary's legal representative (or a natural or an adoptive parent of the current income beneficiary if a legal representative has not been appointed and the current income beneficiary is a minor). Section 1361(d)(2) provides for the time and manner in which the beneficiary of a QSST may elect to have the provisions of section 1361(d) apply. Included is the requirement that the QSST election must be filed within the 2 month and 16 day period beginning on the day that the stock is transferred to the trust. Section 1361(d)(3) sets forth the provisions a trust
instrument must contain for the trust to qualify as a QSST. Under section 1361(d)(3)(A),
the terms of the trust must require that: Rev. Proc. 94-23 provides automatic inadvertent termination relief to certain corporations whose S corporation election terminates because stock of the corporation was transferred to a trust whose current income beneficiary (or the legal representative of the current income beneficiary) inadvertently failed to file a timely election with respect to a QSST under section 1361(d)(2). Section 4 of that revenue procedure provides the prerequisites for automatic relief and the procedural requirements for obtaining it. Section 1361(c)(2)(A)(v) provides that an ESBT (as
defined in section 1361(e)) is a permitted S corporation shareholder. Generally, an ESBT
is any trust if: Section 1361(b)(3)(B) provides that a QSub is a
domestic corporation that is not an ineligible corporation, if: Under section 301.9100-1(c) of the Procedure and
Administration Regulations, the Commissioner may grant a reasonable extension of time to
make a regulatory election or certain statutory elections under all subtitles of the Code,
except subtitles E, G, H, and I, if the taxpayer demonstrates to the satisfaction of the
Commissioner that the taxpayer acted reasonably and in good faith, and that granting the
relief will not prejudice the interests of the Government. Section 301.9100-1(b) defines
the term "regulatory election" as an election whose due date is prescribed by a
regulation published in the Federal Register, or a revenue ruling, revenue procedure,
notice, or announcement published in the Internal Revenue Bulletin. .02 Late S Corporation Elections .03 Untimely QSub Elections .04 Late ESBT and QSST Elections .05 Alternate Relief A corporation is eligible for relief under section 4.03
of this revenue procedure if the following requirements are met: Within 12 months of the original due date for the S
corporation election (but in no event later than the due date for the tax return
(excluding extensions) for the first year the corporation intended to be an S
corporation), the corporation must file with the applicable service center a completed
Form 2553, signed by an officer of the corporation authorized to sign and all persons who
were shareholders at any time during the period that began on the first day of the taxable
year for which the election is to be effective and ends on the day the election is made.
For purposes of signing the shareholder consent, any trust that qualifies for relief under
section 6 of this revenue procedure, but did not hold stock on the first day the
corporation intended S corporation status, is considered an eligible shareholder. In this
situation, the corporation must also file a request for relief pursuant to section 6 of
this revenue procedure and attach it to the Form 2553. The Form 2553 must state at the top
of the document "FILED PURSUANT TO REV. PROC. 98-55." Attached to the Form 2553
must be a statement explaining the reason for the failure to file a timely S corporation
election. A corporation is eligible for relief under section 4.03
of this revenue procedure, and the trustee of a trust that would otherwise qualify as an
ESBT or the beneficiary of a QSST is eligible to make an ESBT or QSST election,
respectively, effective on the first day of the relevant corporation's first taxable year
as an S corporation under section 4.04 of this revenue procedure, if the following
requirements are met: A parent corporation is eligible for relief under
section 4.03 of this revenue procedure, and may make a QSub election with respect to a
subsidiary effective on the first day of the parent corporation's first taxable year as an
S corporation under section 4.04 of this revenue procedure, if the following requirements
are met: Upon receipt of a completed application requesting relief under section 4.01 or 4.02 of this revenue procedure, the Service will determine whether the requirements for granting an additional time to file an S corporation election have been satisfied and will notify the corporation of the result of this determination.
Certain corporations may be eligible for automatic late
S corporation election relief pursuant to Rev. Proc. 97-48. .02 Procedural Requirements for Relief .03 Grant of Additional Time for Filing Certain QSub Elections The current income beneficiary (in the case of a QSST)
or the trustee (in the case of an ESBT) of the trust must sign and file the appropriate
election with the applicable service center. This election must state at the top
"FILED PURSUANT TO REV. PROC. 98-55" and include the following material: .03 Automatic Relief for Late ESBT and QSST Elections |
§§§ Private Letter Ruling §§§
| Section 1362 -- S Corporation Elections -- LTR 9808004 |
| The Service
has ruled that an S corporation's status will be effective as of its incorporation.
====== SUMMARY ====== The Service has ruled that an S corporation's status will be effective as of its incorporation. The corporation, said the IRS, established reasonable cause for not making a timely election and is eligible for relief under section 1362(b)(5). ====== FULL TEXT ====== Date: November 5, 1997 In Reference to: CC:DOM:P&SI:3 PLR-118573-97 LEGEND: Dear * * * [1] This responds to a letter dated July 3, 1997, and subsequent correspondence, written on behalf of X, requesting a ruling under section 1362(b)(5) of the Internal Revenue Code that X's S corporation status will be effective as of the taxable year beginning D1. FACTS [2] According to the information submitted, X began doing business on D1 and it was decided that X would be an S corporation. A and B, X's shareholders, hired an attorney to file X's Form 2553, Election by a Small Business Corporation, to treat X as an S corporation under section 1361. The attorney, however, failed to timely file X's Form 2553. [3] X requests a ruling that it will be recognized as an S corporation effective for the taxable year beginning D1 under section 1362(b)(5). LAW AND ANALYSIS [4] Section 1362(a) provides that a small business corporation may elect to be an S corporation. [5] Section 1362(b) provides the rule on when an S election will be effective. If an S election is made within the first two and one half months of a corporation's taxable year, then that corporation will be treated as an S corporation for the year in which the election is made. If an S election is made after the first two and one half months of 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 made. [6] Section 1362(b)(5) provides that if: (1) no section 1362(a) election is made for any taxable year, and (2) 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 and effective as of the first day of its tax year. CONCLUSION [7] Based solely on the facts submitted and representations set forth above, we conclude that X has established reasonable cause for not making a timely election and is eligible for relief under section 1362(b)(5). Accordingly, if X makes an election to be an S corporation by filing a completed Form 2553, containing an effective date of D1 for the election, within 60 days following the date of this letter, then such election will be treated as timely made. A copy of this letter should be attached to the Form 2553 filed with the service center. A copy is enclosed for that purpose. [8] 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. Specifically, no opinion is expressed concerning whether X is an S corporation for federal tax purposes. [9] This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent. Sincerely yours, William P. O'Shea Enclosures (2) |
| Section 1362 -- S Corporation Elections -- LTR 9808013 |
| The Service
has ruled that an S corporation's status will be effective as of its incorporation.
====== SUMMARY ====== The Service has ruled that an S corporation's status will be effective as of its incorporation. The corporation, said the IRS, established reasonable cause for not making a timely election and is eligible for relief under section 1362(b)(5). ====== FULL TEXT ====== Date: November 14, 1997 In Reference to: CC:DOM:P&SI:2 - PLR-17408-97 Dear * * * [1] This responds to a letter dated August 9, 1997, and subsequent correspondence, written on behalf of X, requesting a ruling under section 1362(b)(5) of the Internal Revenue Code. [2] The information submitted states that X was incorporated on D1 and that A has been X's sole shareholder. A, X's president, represents that a Form 2553, Election by a Small Business Corporation, was prepared for X and intended to be effective for X's Year 1 taxable year. A believed that X's bookkeeper mailed the Form 2553 to the Service on D2. However, X's files do not contain a letter from the Service accepting X's S election for X's Year 1 taxable year or other proof that the Form 2553 was timely mailed to the Service. [3] A represents X was at its formation, is now, and has always been a small business corporation as defined in section 1361(b) of the Code. [4] Section 1362(a) of the Code provides that, except as provided in section 1362(g), a small business corporation may elect, in accordance with the provisions of section 1362, to be an S corporation. [5] Section 1362(b)(1) of the Code provides that an election under section 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. [6] Section 1.1362-6(a)(2)(i) of the Income Tax Regulations provides that a small business corporation makes an election under section 1362(a) of the Code to be an S corporation by filing a completed Form 2553. The election form must be filed with the service center designated in the instructions applicable to Form 2553. [7] Section 1362(b)(5) of the Code provides that if -- (A) an election under section 1362(a) is made for any taxable year after the date prescribed by section 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. [8] Based solely on the facts and the representations submitted, we conclude that X has established reasonable cause for failing to make a timely election to be an S corporation for X's Year 1 taxable year. Accordingly, provided X makes an election to be an S corporation by filing a completed Form 2553 with the appropriate service center effective for its Year 1 taxable year, within 60 days following the date of this letter, then such election will be treated as timely made for X's Year 1 taxable year. A copy of this letter should be attached to the Form 2553. [9] 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, including whether X was or is a small business corporation under section 1361(b) of the Code. [10] This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent. [11] Pursuant to a power of attorney on file, a copy of this letter is being sent to X's authorized representative. Sincerely, Arthur H. Ernst Enclosures: 2 |
IRC Regulation 1.1362-0
(iii) Extension of time for filing consents to an election --
(A) In general.
An election that is timely filed for any taxable year and that would be valid except for the failure of any shareholder to file a timely consent is not invalid if consents are filed as required under paragraph (b)(3)(iii)(B) of this section and it is shown to the satisfaction of the district director or director of the service center with which the corporation files its income tax return that --
(1) There was reasonable cause for the failure to file the consent;
(2) The request for the extension of time to file a consent is made within a reasonable time under the circumstances; and
(3) The interests of the Government will not be jeopardized by treating the election as valid.
(B) Required consents.
Consents must be filed within the extended period of time as may be granted by the Internal Revenue Service, by all persons who --
(1) Were shareholders of the corporation at any time during the period beginning as of the date of the invalid election and ending on the date on which an extension of time is granted in accordance with this paragraph (b)(3)(iii); and
(2) Have not previously consented to the election.
[T.D. 8449, 57 FR 55445-55457, Nov. 25, 1992.]
Title 26 Section 1362
(b) When made
(1) In general
An election under subsection (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 3d month of the taxable year.
(2) Certain elections made during 1st 2-1/2 months treated as made for next taxable year
If--
(A) an election under subsection (a) is made for any taxable year during such year and on or before the 15th day of the 3d month of such year, but
(B) either--
(i) on 1 or more days in such taxable year before the day on which the election was made the corporation did not meet the requirements of subsection (b) of section 1361, or
(ii) 1 or more of the persons who held stock in the corporation during such taxable year and before the election was made did not consent to the election,
then such election shall be treated as made for the following taxable year.
(3) Election made after 1st 2-1/2 months treated as made for following taxable year
If--
(A) a small business corporation makes an election under subsection (a) for any taxable year, and
(B) such election is made after the 15th day of the 3d month of the taxable year and on or before the 15th day of the 3rd month of the following taxable year,
then such election shall be treated as made for the following taxable year.
(4) Taxable years of 2-1/2 months or less
For purposes of this subsection, an election for a taxable year made not later than 2 months and 15 days after the first day of the taxable year shall be treated as timely made during such year.
(5) Authority to treat late elections, etc., as timely. --
If --
(A) an election under subsection (a) is made for any taxable year (determined without regard to paragraph (3)) after the date prescribed by this subsection 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 (and paragraph (3) shall not apply).
Revenue Procedure 97-40
Rev. Proc. 97-40
1997-33 I.R.B. 50
Section 1362 -- S Corporation Elections
Statement of Procedural Rules
Summary
IRS ISSUES NEW PROCEDURE FOR LATE S CORPORATION ELECTIONS.
The Service has announced (Rev. Proc. 97-40; IR-97-34) a new procedure for requesting relief for late S corporation elections. Rev. Proc. 97-40 applies only to corporations (1) that have not filed a timely S corporation election under section 1362(a)(1), and (2) for which an S corporation election is filed within six months of the original due date of the election.
To obtain relief under the new procedure, eligible corporations must, within six months of the original election due date, file a completed Form 2553, "Election by Small Business Corporation," with the applicable service center. The form must be signed by a corporate officer and all persons who were shareholders during the period that (1) began on the first day of the tax year for which the election takes effect; and (2) ends on the day the election is made. Additionally, the top of the form must state "FILED PURSUANT TO REV. PROC. 97-40." A statement explaining the reason for the failure to file the S corporation election must also be attached. If, after reviewing the completed application, the Service decides there was reasonable cause for the failure to file a timely election, it will notify the corporation of that fact.
To be eligible for relief under the procedure, a corporation must (1) fail to qualify as an S corporation solely because the Form 2553 was not filed timely under section 1362(b)(1); and (2) the due date for the tax return (excluding extensions) for the first year the corporation intended to be an S corporation has not passed.
As a result of the new procedure, the Service says, corporations seeking relief from late S corporation elections no longer need to apply for a private letter ruling or pay a user fee. Ineligible corporations, or corporations denied relief under the procedure, however, must still apply for a private letter ruling under Rev. Proc. 97-1, 1997-1 IRB 11, if they desire relief. Similarly, the Service says, the procedure does not provide relief for late shareholder elections, including qualified subchapter S trust elections or electing small business trust elections.
Rev. Proc. 97-40 is effective for all qualifying applications for relief, including those applications now being considered by the IRS.
Full Text
Rev. Proc. 97-40
SECTION 1. PURPOSE
This revenue procedure provides guidance under section 1362(b)(5) of the Internal Revenue Code for requesting relief for late S corporation elections that are filed within 6 months of the due date of the election.
SECTION 2. BACKGROUND
Section 1361(a)(1) defines an "S corporation," with respect to any taxable year, as a small business corporation for which an S election is in effect for that year.
Section 1362(a)(1) provides that, except in a situation described in section 1362(g), a small business corporation may elect to be treated as an S corporation.
Section 1362(b)(1) provides that the corporation may make an election to be treated as an S corporation (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 3rd month of the taxable year. Under section 1362(b)(3), if an S corporation election is made for a taxable year after the 15th day of the 3rd month of that taxable year and on or before the 15th day of the 3rd month of the following taxable year, then the S corporation election is treated as made for the following taxable year.
Section 1362(b)(5) provides that if (A) an election under section 1362(a) is made for any taxable year (determined without regard to section 1362(b)(3)) after the date prescribed by section 1362(b) for making the election for the taxable year or no election is made for any taxable year, and (B) the Secretary determines that there was reasonable cause for the failure to timely make the election, the Secretary may treat the election as timely made for the taxable year (and section 1362(b)(3) shall not apply).
SECTION 3. SCOPE
This revenue procedure provides a special procedure to request relief for a late S corporation election. This revenue procedure applies only to a corporation (1) that has not filed a timely S corporation election under section 1362(a)(1), and (2) for which an S corporation election is filed within 6 months of the original due date for the election. This revenue procedure does not provide relief for late shareholder elections including a qualified subchapter S trust (QSST) election or electing small business trust (ESBT) election. This special procedure is in lieu of the letter ruling procedure that is used to obtain relief for a late S corporation election under section 1362(b)(5). Accordingly, user fees do not apply to corrective action under this revenue procedure. A corporation that is not eligible for relief under this revenue procedure, or is denied relief, may request relief by applying for a private letter ruling. The procedural requirements for requesting a private letter ruling are described in Rev. Proc. 97-1, 1997-1 I.R.B. 11 (or its successor).
SECTION 4. RELIEF FOR LATE S CORPORATION ELECTIONS UNDER THIS REVENUE PROCEDURE
.01 ELIGIBILITY FOR RELIEF. A corporation is eligible for relief if it meets the following requirements:
(1) The corporation fails to qualify as an S corporation solely because the Form 2553 (Election by a Small Business Corporation) was not filed timely pursuant to section 1362(b)(1); and
(2) The due date for the tax return (excluding extensions) for the first year the corporation intended to be an S corporation has not passed.
.02 PROCEDURAL REQUIREMENTS FOR RELIEF. Within 6 months of the original due date for the S corporation election, the corporation must file with the applicable service center a completed Form 2553, signed by an officer of the corporation authorized to sign and all persons who were shareholders (or deemed to have been shareholders) at any time during the period that began on the first day of the taxable year for which the election is to be effective and ends on the day the election is made. The Form 2553 must state at the top of the document "FILED PURSUANT TO REV. PROC. 97-40." Attached to the Form 2553 must be a statement explaining the reason for the failure to file a timely S corporation election.
.03 RELIEF FOR LATE S CORPORATION ELECTIONS. Upon receipt of a completed application requesting relief under this revenue procedure, the Internal Revenue Service will determine if there was reasonable cause for the failure to file a timely S corporation election and will notify the corporation of the result of the reasonable cause determination.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective for all applications for relief satisfying the requirements of section 4 of this revenue procedure, including those applications now being considered by the Service.
SECTION 6. PAPERWORK REDUCTION ACT
The collection of information contained in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1548.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.
The collection of information in this revenue procedure is in Section 4.02. This information is required to be submitted to the applicable service center in order to obtain relief for late S corporation elections. This information will be used to determine if the reasonable cause requirement in section 1362(b)(5) has been met. The collection of information is required to obtain a benefit. The likely respondents are business or other for-profit institutions.
The estimated total annual reporting burden is 200 hours.
The estimated annual burden per respondent varies from .5 hours to 1.5 hours, depending on individual circumstances, with an estimated average of 1 hour. The estimated number of respondents is 200.
The estimated annual frequency of responses is one.
Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue procedure is Mark D. Harris of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure contact Mr. Harris at (202) 622-3050 (not a toll-free call).
Reserved
Reserved
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