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Tax Hot Topics: IRS consolidates guidance for late S corporation elections

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The IRS has issued Rev. Proc. 2013-30, 2013-36 IRB 1, which consolidates previous guidance for taxpayers making late S corporation elections (S elections), late small business trust (ESBT) elections, late qualified subchapter S trust (QSST) elections, late qualified subchapter S subsidiary (QSUB) elections and certain late corporate classification elections.

The new revenue procedure is now the exclusive, simplified method for obtaining relief for late S elections. It modifies and supersedes Rev. Proc. 2007-62, Rev. Proc. 2003-43 and Rev. Proc. 97-48, and is effective Sept. 3, 2013. No user fee is required when requesting relief under Rev. Proc. 2013-30.

Generally, Section 1362 and its corresponding regulations provide that a corporation meeting all the requirements to be a small business corporation may elect to be treated as a subchapter S corporation for federal income tax purposes, if the election is timely and properly made. Under the new revenue procedure, a corporation that failed to properly elect S corporation status must meet the following requirements to be granted relief:

  • The corporation must have intended to be classified as an S corporation as of the requested effective date of the S election.
  • The corporation must request relief within three years and 75 days after the intended effective date of the S election (with one exception, discussed a few paragraphs down.)
  • The corporation’s failure to qualify as an S corporation must be solely because the S election was not filed by the due date of that S election.
  • The corporation has reasonable cause for its failure to make a timely S election and has acted diligently to correct the mistake upon discovering it.
  • All shareholders, during the period between the date the S election was to have become effective and the date Form 2553 is filed, must have reported their income on all affected returns consistent with the S election for the year of the election and all subsequent years (and a statement to such effect must be attached to Form 2553).

A corporation that meets the requirements listed above must take the following actions to obtain relief under the revenue procedure:
Complete an S election on Form 2553 and attach certain supporting documents as described in the revenue procedure.
Have Form 2553 signed by an officer of the corporation and all shareholders 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 that Form 2553 is filed.
Type “FILED PURSUANT TO REV. PROC. 2013-30” across the top of Form 2553.

Attach a reasonable cause statement to Form 2553 that describes the corporation’s (i) reasonable cause for failure to file the S election in a timely manner and (ii) diligent actions to correct the mistake upon its discovery.

File Form 2553 with the corporation’s applicable IRS Service Center by either (i) attaching it to the corporation’s current year Form 1120S as long as the 1120S is filed within three years and 75 days after the intended effective date of the S election, (ii) attaching it to a late filed prior year Form 1120S as long as the 1120S is filed within three years and 75 days after the intended effective date of the S election and all other delinquent Forms 1120S are filed simultaneously, or (iii) submitting it directly to the applicable IRS Service Center within three years and 75 days after the intended effective date of the S election.

Rev. Proc. 2013-30 generally provides that relief for a late S election must be requested within three years and 75 days after the intended effective date of the S election. The revenue procedure provides one notable exception to this timing rule. The three-year, 75-day rule does not apply to a corporation when:

  • the corporation is not seeking concurrent relief for a late entity classification election, 
  • the corporation fails to qualify as an S corporation solely because Form 2553 was not filed in a timely manner,
  • the corporation always reported income consistent with S corporation status,
  • at least six months have elapsed since the date on which the  corporation filed its tax return for the first year that it intended to be an S corporation,
  • neither the corporation nor any of its shareholders was notified by the IRS of any problem regarding the S corporation status within six months of the date on which the Form 1120S for the first year was filed in a timely manner, and
  • the corporation includes the various statements required by the revenue procedure.

If a corporation does not meet the requirements set forth in Rev. Proc. 2013-30 for relief from a late S election, the corporation may still apply for relief by requesting a private letter ruling from the IRS.

In addition to relief for late S elections, Rev. Proc. 2013-30 also provides the exclusive methods for relief for late ESBT elections, QSST elections, QSUB elections and late corporate classification elections that the taxpayer intended to take effect on the same date as the intended S election. The revenue procedure should be consulted for details on the proper steps for requesting relief for these late elections. In general, all such relief must be requested within three years and 75 days after the intended effective date of the underlying election. Rev. Proc. 2013-30 includes various flow charts that summarize the rules for obtaining relief.

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