S Corp Procedure Expands Time for Applying Corrective Procedures to Late Elections
(Parker's Federal Tax Bulletin: August 29, 2013)

Late S corporation elections, such as the election to become an S corporation, or the election by certain trusts to become an eligible S corporation shareholder, can result in additional taxes if not properly corrected. In what is good news for practitioners, the IRS issued Rev. Proc. 2013-30, which will greatly simplify obtaining relief for these various late S corporation elections. The procedure is more liberal in that it expands the time period taxpayers have in which to request relief from late S corporation elections. The new procedure provides corrective actions for various late S corporation elections and eliminates compliance with a number of prior procedures that taxpayers had to navigate to obtain such relief. The guidance is in lieu of requesting an IRS ruling and, thus, there is no user fee for requests filed under Rev. Proc. 2013-30. While there may still be some taxpayers that do not fall within the new procedure and will have to request an IRS ruling and pay a user fee, the number of such taxpayers is minimized under the new procedure.

OBSERVATION: Under the prior corrective procedures, taxpayers had to apply for relief within 24 months of the due date of the election. Under Rev. Proc. 2013-30, a taxpayer has three years and 75 days from the date the election was to be effective to apply for relief.

Rev. Proc. 2013-30 supersedes Rev. Procs. 2003-43, 2004-48, and 2007-62 and applies to taxpayers making late S corporation elections, late electing small business trust (ESBT) elections, late qualified subchapter S trust (QSST) elections, late qualified subchapter subsidiary (QSub) elections, and late corporate classification elections which the taxpayer intended to take effect on the same date that the taxpayer intended than an S corporation election for the entity to take effect. Additionally, Rev. Proc. 2013-30 obsoletes portions of Rev. Proc. 97-48 and Rev. Proc. 2004-49.

Practice Tip: Practitioners can request a refund of user fees paid for any letter ruling request seeking relief for a late election covered by Rev. Proc. 2013-30 that is still pending at the IRS National Office on September 3. However, the National Office will process such letter ruling requests unless, before the earlier of October 18, 2013, or the issuance of the letter ruling, the practitioner notifies the IRS that the entity will rely on Rev. Proc. 2013-30 and withdraw its letter ruling request.

General Requirements for All Late Elections

Rev. Proc. 2013-30 lays out specific requirements for relief for each of the various late elections. However, taxpayers must also meet the following general requirements for relief for each late election:

(1) The entity must have intended to be classified as an S corporation, must have intended for the trust to be an ESBT, must have intended for the trust to be a QSST, or must have intended to treat a subsidiary corporation as a QSub as of the date on which the election was intended to be effective (i.e., the effective date).

(2) The entity must request relief within three years and 75 days after the effective date (except in the case where the corporation is not seeking late corporate classification election relief concurrently with a late S corporation election and the corporation failed to qualify as an S corporation solely because the Form 2553 was not timely filed).

(3) The failure to qualify as an S corporation, ESBT, QSST, or QSub as of the effective date was solely because the election was not timely filed.

(4) In the case of a request for relief for a late S corporation or QSub election, the entity has reasonable cause for its failure to make the timely election and acted diligently to correct the mistake upon its discovery. In the case of a request for relief for an inadvertently invalid S corporation election or an inadvertent termination of an S corporation election due to the failure to make the timely ESBT or QSST election, the failure to file the timely election was inadvertent and the S corporation and the person or entity seeking relief acted diligently to correct the mistake upon its discovery.

Practice Tip: The supporting statement describing the reasonable cause for not timely filing the election and the diligent actions taken to correct the mistake must be signed under penalties of perjury, using the following wording: "Under penalties of perjury, I (we) declare that I (we) have examined this election, including accompanying documents, and, to the best of my (our) knowledge and belief, the election contains all the relevant facts relating to the election, and such facts are true, correct, and complete." This declaration must be signed by an officer of the S corporation authorized to sign, the trustee of the ESBT, the current income beneficiary of the QSST, or a shareholder, as applicable.

Relief for Late S Corporation Elections

A taxpayer can obtain relief under Rev. Proc. 2013-30 for a late S corporation election by: (1) filing a completed Form 2553 that is signed by (a) an officer of the corporation authorized to sign, and (b) all persons who were shareholders at any time during the period that began on the first day of the tax year for which the election is to be effective and ends on the day the completed Form 2553 is filed; and (2) filing statements from all shareholders during the period between the date the S corporation election was to have become effective and the date the completed Form 2553 is filed that they have reported their income on all affected returns consistent with the S corporation election for the year the election should have been filed and for all subsequent years.

In the case of a late corporate classification election intended to be effective on the same date that the S corporation election was intended to be effective, the completed Form 2553 must also include the following representations, signed under penalties of perjury:

(1) that the entity is one that is eligible for relief;

(2) that the entity intended to be classified as a corporation as of the effective date of the S corporation status;

(3) that the entity failed to qualify as a corporation solely because Form 8832 was not timely filed, or Form 8832 was not deemed to have been filed;

(4) that the entity failed to qualify as an S corporation on the effective date of the S corporation status solely because the S corporation election was not timely filed; and

(5) that the entity timely filed all required federal tax returns and information returns consistent with its requested classification as an S corporation for all of the years the entity intended to be an S corporation and no inconsistent tax or information returns have been filed by or with respect to the entity during any of the tax years, or the entity has not filed a federal tax or information return for the first year in which the election was intended to be effective because the due date has not passed for that year's federal tax or information return.

The requirement that relief be requested within three years and 75 days of the date the election was intended to be effective does not apply in the following situations:

The corporation is not seeking late corporate classification election relief concurrently with a late S corporation election under this revenue procedure; The corporation fails to qualify as an S corporation solely because the Form 2553 was not timely filed; The corporation and all of its shareholders reported their income consistent with S corporation status for the year the S corporation election should have been made, and for every subsequent tax year (if any); At least six months have elapsed since the date on which the corporation filed its tax return for the first year the corporation 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 timely filed, and The completed election form includes the statement(s), signed under penalties of perjury, from all shareholders during the period between the date the S corporation election was to have become effective and the date the completed election form is filed that they have reported their income on all affected returns consistent with the S corporation election for the year the election should have been filed and for all subsequent years.

Relief for Late ESBT and QSST Elections

A taxpayer can obtain relief under Rev. Proc. 2013-30 for late ESBT and QSST elections by:

(1) having the trustee of the ESBT sign or file the appropriate statements, or having the current income beneficiary of a QSST sign and file Form 2553 and separate statements. The completed form must include the following statements, signed under penalties of perjury:

(2) in the case of a QSST, filing a statement from the trustee that the trust satisfies the QSST requirements and that the income distribution requirements have been and will continue to be met;

(3) in the case of an ESBT, a statement from the trustee that all potential current beneficiaries meet the shareholder requirements of Code Sec. 1361(b)(1) and that the trust satisfies the requirements of an ESBT under Code Sec. 1361(e)(1) other than the requirement to make an ESBT election; and

(4) statements from all shareholders during the period between the date the S corporation election was to have become effective or was terminated and the date the completed election form is filed that they have reported their income on all affected returns consistent with the S corporation election for the year the election should have been made and for all subsequent years.

Relief for Late QSub Elections

A taxpayer can obtain relief under Rev. Proc. 2013-30 for late QSub elections by filing Form 8869, Qualified Subchapter S Subsidiary Election, and including with the form a statement signed by an officer of the S corporation, under penalties of perjury, that the subsidiary corporation satisfies the applicable QSub requirements, and that all assets, liabilities, and items of income, deduction, and credit of the QSub have been treated as assets, liabilities, and items of income, deduction, and credit of the S corporation on all affected returns consistent with the QSub election for the year the election was intended to be effective and for all subsequent years.

Effective Date

Rev. Proc. 2013-30 is effective September 3, 2013. It applies to requests pending with the IRS Service Center pursuant to Rev. Procs. 97-48, 2003-43, 2004-48, and 2007-62 on September 3, 2013, and to requests received thereafter. It also applies to all ruling requests pending in the IRS national office on September 3, 2013, and to requests for relief received thereafter.

If an entity has filed a request for a letter ruling seeking relief for a late S election covered by Rev. Proc. 2013-30 that is pending in the IRS National Office on September 3, 2013, the entity may rely on Rev. Proc. 2013-30, withdraw that letter ruling request, and receive a refund of its user fee. However, the National Office will process letter ruling requests pending on September 3, 2013, unless, before the earlier of October 18, 2013, or the issuance of the letter ruling, the entity notifies the National Office that it will rely on Rev. Proc. 2013-30 and withdraw its letter ruling request.

Parker Tax Publishing Staff Writers

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