The Service Continues its Warm Approach to Taxpayers with S Corporation Inadvertent Terminations (PLR 201340001)
As we know, in accordance with Code Section 1362(f) and the corresponding Treasury Regulations, a corporation will continue to be treated as a Subchapter S corporation during a period of termination, if:
- The election was terminated, either because the corporation was disqualified as an electing small business corporation, or as a result of running afoul of the passive investment income rule;
- The Service determines the termination as inadvertent;
- The corporation promptly takes steps to correct the defect after discovery; and
- The corporation and its shareholders acted as if the election was continuously in effect.
Continuation of an S election following an inadvertent termination is ultimately within the Secretary’s sole discretion. Unfortunately, taxpayers must request a ruling to obtain relief. Treas. Reg. Section 1.1362-4(c). The good news, however, is that the Service routinely issues affirmative rulings in this area.
Private Letter Ruling 201340001 (October 18, 2013) is an example of the Service issuing inadvertent termination relief. In this private letter ruling, shares of the taxpayer were transferred to a trust which was an ineligible shareholder. The next day, the taxpayer discovered the problem and immediately caused the shares to be transferred to an eligible shareholder. The Service, in its ruling, emphasized that the taxpayer represented that:
- Its shareholders at all times since the effective date of the S election treated the corporation as an S corporation;
- The termination was not motivated by tax avoidance or retroactive tax planning;
- The eligible shareholder who ultimately received the shares reported all items of the taxpayer’s income, loss, deduction and credit that would have been allocated to the ineligible trust shareholder, and the eligible shareholder paid all taxes associated therewith; and
- The taxpayer’s shareholders agreed to make any adjustments required by the Secretary.
Based upon these representations, the Service granted relief to the taxpayer. While a private letter ruling is only binding on the Service and the taxpayer who obtains it, this ruling is a good reminder to practitioners that relief may be granted under Code Section 1362(f) for inadvertent S corporation terminations. The keys to obtaining an affirmative ruling in the advertent termination area appear to be fourfold: (i) the termination was inadvertent; (ii) prompt curative action was taken after discovery of the error; (iii) the shareholders acted consistently with the election being in continuous effect; and (iv) the absence of any tax avoidance motives.
If you are faced with an inadvertent S corporation termination because the corporation no longer qualifies as an electing small business corporation or due to violating Code Section 1362(d)(3) (excessive passive investment income), you may be able to obtain relief under Section 1362(f). A ruling request, however, will be required.
While the IRS is back in business following the recent government shutdown, it may not receive your requests for private letter rulings with open arms. Before requesting a private letter ruling, tax practitioners need to review the Service’s recent no-ruling revenue procedures, namely Revenue Procedure 2013-32 and Revenue Procedure 2013-3.
While the new no-ruling revenue procedures are broad in scope, it is possible the Service may still issue rulings in areas that otherwise appear to be no-ruling topics. So, you should consider a pre-submission meeting or conversation with the IRS to determine whether a ruling may be available and/or to discuss how you should tailor a ruling request in light of these new revenue procedures.
Revenue Procedure 2013-32
Revenue Procedure 2013-32, issued on June 26, 2013, provides that the Service will no longer issue rulings on whether transactions qualify for nonrecognition treatment under Code Sections 332, 351, 355 or 1036, or constitute a tax-free reorganization under Code Section 368. The revenue procedure indicates, however, that the IRS will rule on “significant issues” arising under these code sections that address tax consequences resulting from their application. What constitutes a “significant issue” is yet to be clarified by the Service.
Revenue Procedure 2013-3
Revenue Procedure 2013-3, issued on January 3, 2013, added recapitalizations, leveraged spin-offs, and so-called “north-south” transactions under Code Section 355 to its no-ruling list. Each of these topics is subject to pending IRS guidance projects.
If you have questions about the application of these no-ruling revenue procedures, contact Gerald B. Fleming, IRS Senior Technician Reviewer, Corporate, Branch #2, (202) 622?-7770 (Room 5138).
There are rumors circulating in the media that taxpayer filing and payment obligations are currently on hold pending the Federal shutdown. WRONG!
The IRS announced last week, despite its limited resources during the shutdown, taxpayer obligations continue. These obligations must be met in a timely manner. There will be no extensions arising from the shutdown.
Individuals and businesses are required to file returns, pay taxes, make estimate tax payments, and make tax deposits in a timely manner as required by applicable law. The shutdown does not impact these obligations or the time frame in which to fulfill them. It does, however, create a few hiccups for tax advisors and their clients, including:
- The Service remains unable to issue refunds during the shutdown. Taxpayers in need of a refund are out in the cold.
- Despite statements that the office of the National Tax Advocate will remain open, Forbes staff member, Janet Novack, reports that the IRS has changed its mind and is now furloughing the National Tax Advocate, Nina Olson, and the 44 members of her staff. So, it appears, other than computer-automated assistance, help from IRS staff will be unavailable during the remainder of the shutdown.
- Automatic notices will continue to be generated by the IRS, but there will be no staff at the Service to assist taxpayers. If a taxpayer already paid an assessment or remedied a tax defect, it appears nothing can be done to stop continuing automated notices during the remainder of the shutdown.
- The IRS reports no new levies or liens will be filed against taxpayers during the shutdown, except for levies or liens which were originated before the shutdown. If a taxpayer had a bank account levied upon by the IRS before the shutdown, there appears to be nothing the taxpayer can do to obtain a release during the shutdown. If 21 days pass without a release, the funds will normally be turned over to the Service (without the opportunity to obtain a refund during the shutdown).
The IRS advises that taxpayers should do the following during the shutdown:
- Continue to timely file returns and pay taxes;
- Electronically file returns whenever possible;
- If a taxpayer needs a tax transcript during the shutdown, they should go to www.IRS.gov and use the automated system. It will typically take 5-10 calendar days to receive the tax transcript;
- Be aware, the IRS has stated that it is still taking enforcement action in limited situations during the shutdown (e.g., where the collection statute of limitations is about expire); and
- IRS criminal investigations continue. Employees in the Criminal Investigative Division of the IRS were not furloughed.
Larry J. Brant
Larry J. Brant is a Shareholder in Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- "The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, but It Isn’t Free of Potholes and Obstacles," New York University 78th Institute on Federal TaxationNew York, NY, 10.24.19
- "The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, but It Isn’t Free of Potholes and Obstacles," Oregon Society of Certified Public Accountants (OSCPA) 2019 Northwest Federal Tax ConferencePortland, OR, 10.28.19
- "The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, but It Isn’t Free of Potholes and Obstacles," New York University 78th Institute on Federal TaxationSan Francisco, CA, 11.14.19
- "The Oregon Corporate Activity Tax," Oregon Society of Certified Public Accountants (OSCPA) 2020 OSCPA State & Local Tax ConferencePortland, OR, 1.6.20
- "The Road Between Subchapter C and Subchapter S – It May Be A Well-Traveled Two-Way Thoroughfare, But It Isn’t Free of Potholes and Obstacles," The J. Nelson Young Tax InstituteChapel Hill, NC, 4.23.2020-4.24.2020