Recently issued IRS guidance contained within Rev. Proc. 2022-19 includes helpful information that will allow taxpayers to resolve certain issues involving potential inadvertent invalid S corporation or qualified subchapter S subsidiary (QSub) elections or terminations. This guidance notes that taxpayers will not have to request a private letter ruling (PLR) in many cases. The IRS has identified six areas that have historically caused taxpayers to question whether or not they have inadvertent invalid elections or terminations under Internal Revenue Code (IRC) Section 1362(f). This article breaks down these six areas.
The first five items listed below are areas the IRS has generally ruled do not impact the validity of a taxpayer’s S corp election under IRC Section 1362(a) or its election to treat a subsidiary as a QSub under IRC Section 1361(b)(3)(B)(ii).
- Agreements and arrangements with no principal purpose to circumvent the one class of stock requirement
- Governing provisions that provide distribution and liquidation rights that are identical
- Missing shareholder consents and signatures, incorrect permitted tax year, and other errors and omissions that qualify as inadvertent (Forms 2553 and 8869)
- S Election or QSub Election verification
- Inconsistent federal income tax return filings based upon S Election or QSub Election
In most cases, no further action is required. However, corrections related to the third item above will necessitate the taxpayer to use one of the historical relief provisions related to a missing shareholder consent or signature, or an incorrect adoption of a tax year (IRC Section 1.1362-6(b)(3)(iii), Rev. Proc.2013-30, Rev. Proc. 2004-34, or a PLR, as applicable). If the issue involves other errors or omissions not mentioned previously, a written explanation along with the corrected form will need to be mailed to the IRS.
The last area identified is one that may require a bit more remedial action:
- Correction of one or more non-identical governing provisions
To resolve any issues with this area, both corporate and shareholder statements will need to be completed and updates made to any documents which are necessary to remove non-identical governing provisions. All of these documents must be retained and provided for inspection by the IRS upon their request. To be eligible for the retroactive relief provided by this guidance, the taxpayer must meet all of the following:
- The corporation has or at some point had one or more non-identical governing provisions
- The corporation has not made, including having not been deemed to have made for federal income tax purposes, a disproportionate distribution to an applicable shareholder
- The corporation has timely filed its Form 1120-S for each tax year starting with the year the first non-incidental governing provision was adopted and ending with the tax year immediately before the tax year the corporation utilized this Rev. Proc. for relief
- The corrective action required by the Rev. Proc. is taken before the non-incidental governing provisions are discovered by the IRS
In addition, Rev. Proc. 2022-19 contains a list of areas on which the IRS will no longer issue PLRs, as well as a list of areas on which the IRS will no longer ordinarily issue PLRs unless certain requirements are met.
For more information, see Rev. Proc. 2022-19 contained within IRB 2022-41.
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