Source: https://candbinc.com/understanding-s-corporations/
Timestamp: 2019-04-20 20:43:12+00:00

Document:
Understanding S Corporations - Checked & Balanced, Inc.
Of those returns about 70 percent of these are Forms 1120S, showing that an S corporation is the preferred choice among corporations.1 To qualify as an S corporation, a corporation must satisfy specific requirements and must file an election. It is not uncommon to find that a corporation has not filed its election. This was a common audit issue when I worked for the IRS many years ago. If a corporation hasn’t filed its S election, there can be undesirable income tax consequences. The corporation is treated as a C corporation, which can result in double taxation of profits or dis-allowance of flow-through losses. In addition, corporations who do file the election sometimes become ineligible for the S corporation election, resulting in its termination.
To be effective on the first day of the corporation’s taxable year, the S election must be filed no later than the 15th day of the third month of that year.8 If the election is filed after this date, then it is considered to be effective for the next taxable year. 9 The 15th day of the third month is not necessarily March 15. A corporation’s year begins when the corporation has shareholders, acquires assets or begins doing business, whichever occurs first.10 This could be any day of the year. A limited liability company may also file an S corporation election, and such election is treated both as an entity classification election (to be treated as an association taxable as a corporation), and as an S corporation election.11 As mentioned above, certain trusts are permitted to be shareholders of an S corporation. These include a Qualified Subchapter S Trust (QSST) and an Electing Small Business Trust (ESBT).12 To be a shareholder, the beneficiary of the QSST and the trustee of the ESBT must make an election.13 The election must be filed within two and a half months of the date that the stock is transferred to the trust.14 In addition, an S corporation may elect to treat a wholly owned subsidiary as a Qualified Subchapter S Subsidiary (QSub).15 The S corporation parent may make the election at any time during the year.16 The election is made by filing Form 8869, Qualified Subchapter S Subsidiary Election. Relief from Filing a Late S Corporation Election Before 1996, the IRS had no authority to approve late-filed S corporation elections.
A corporation that desires such relief must file a request for a letter ruling.38 The IRS issues dozens of such letter rulings every year granting relief. A frequent situation is where a shareholder dies and the stock is transferred to a trust; the IRS grants relief by allowing the beneficiary additional time to file a late QSST election. If an S corporation revoked or inadvertently terminated its S election, then why not simply file a new election? Because the Code precludes this. If the S corporation revoked or terminated its election, then it, and any successor corporation, is ineligible to make a new election for five years, unless the IRS consents.39 The IRS will not waive the five-year waiting period unless the event causing termination was beyond the corporation’s control.40 The IRS will also not allow the corporation to simply transfer its assets to a new corporation and make a new S corporation election to avoid the five-year waiting period.41 Conclusion As a tax practitioner, it is important for you to know the rules for qualifying as an S corporation and for filing a late S corporation election so that you can advise your clients on the proper course of action in the event that it is discovered that the election was not timely-filed, not filed at all, or was inadvertently terminated. I hope that this article has helped explain the rules and the relief available.
1 Source: IRS Selected Financial Data on Businesses, http://www.irs.gov/uac/SOI-Tax-Stats Integrated-Business-Data. 2 See, e.g., David E. Watson, P.C. v. United States, 757 F.Supp.2d 877 (S.D. Iowa 2010), aff’d. 668 F.3d 1008 (8th Cir. 2012), cert. denied 133 S.Ct. 364 (2012). 3 IRC § 1366(d)(1). 4 IRC § 1361(b)(1). 5 Treas. Reg. § 1.1362-6(a)(2). 6 IRC § 1362(a)(2). If the stock is community property, then both spouses must sign the consent. See Treas. Reg. §1.1362-6(b)(2)(i). 7 Treas. Reg. § 1.1362-6(a)(2). 8 IRC § 1362(b)(1)(B). 9 IRC § 1362(b)(3). 10 Treas. Reg. § 1.1362-6(a)(2)(ii)(C). 11 Treas. Reg. § 301.7701-3(c)(1)(v)(C). 12 IRC §§ 1361(d) and (e). 13 IRC §§ 1361(d)(2) and (e)(3). 14 Treas. Reg. §§ 1.1361-1(j)(6)(iii)(A) and 1.1361-1(m)(2)(iii). 15 IRC § 1361(b)(3)(B). 16 Treas. Reg. § 1.1361-3(a)(3). 17 § 1305(b), Small Business Jobs Protection Act of 1996, P.L. 104-188. 18 IRC § 1362(b)(5). 19 Rev. Proc. 97-48, 1997-43 I.R.B. 19. 20 Id., Section 3. 21 Rev. Proc. 2002-59, 2002-39 I.R.B. 615; Rev. Proc. 2003-43, 2003-23 I.R.B. 998; Rev. Proc. 2004-48, 2004-32 I.R.B. 172; Rev. Proc. 2004-49, 2004-33 I.R.B. 210; and Rev. Proc. 2007-62, 2007-41 I.R.B. 786. 22 Rev. Proc. 2013-30, 2013-36 I.R.B. 173. 23 Id., Section 4.02. 24 Id., Section 5.04. 25 Id., Section 5.03. 26 Id., Sections 4.03(2)(a), (b) and (c). 27 Id., Section 4.03(1). 28 Id., Sections 4.03(1) and (3). 29 See Rev. Proc. 2015-1, 2015-1 I.R.B. 1. 30 Id., Appendix A. For requests received after 2/1/2015, the user fee is $9,800, but a reduced user fee of $6,500 applies if the corporation’s gross income on its most recently-filed return was less than $1 million, $2,200 if gross income was less than $250,000. 31 IRC §§ 1362(d)(1), (2) and (3). 32 Treas. Reg. § 1.1362-6(a)(3). 33 IRC § 1362(d)(1)(C). 34 Treas. Reg. § 1.1362-6(a)(4). 35 IRC § 1362(f). 36 IRC § 1362(f)(3). 37 IRC § 1362(f)(4); Treas. Reg. § 1.1362-4(d). 38 Treas. Reg. § 1.1362-4(c). 39 IRC § 1362(g). 40 Treas. Reg. § 1.1362-5(a). 41 Treas. Reg. § 1.1362-5(b).

References: v. 
 § 1366
 § 1361
 § 1
 § 1362
 §1
 § 1
 § 1362
 § 1362
 § 1
 § 301
 § 1361
 § 1
 § 1305
 § 1362
 § 1
 § 1362
 § 1
 § 1362
 § 1362
 § 1362
 § 1
 § 1
 § 1362
 § 1
 § 1