Late elections relief: new rules further streamline elections process.

• Author: Josephs, Stuart R.
• Position: Federaltax - Internal Revenue Service

For tax years ending after Dec. 30, 2007, Rev. Proc. 2007-62 (IRB 2007-41, Oct. 9, 2007) provides another simplified method for taxpayers to request relief for late S corporation elections.

This revenue procedure also provides a simplified method for taxpayers to request relief for a late S corp election and a late corporate classification election intended to be effective on the same date that the S corp election was intended to be effective. User fees do not apply to corrective actions under Rev. Proc. 2007-62.

Background

Late S Elections

IRC Sec. 1362(b)(5) provides that the IRS may treat a late or nonexistent election as timely if the IRS determines there was reasonable cause for failing to elect timely.

Rev. Proc. 97-48 contains special procedures to obtain automatic relief for certain late S elections. Generally, relief is available if:

* A corporation intends to be an S corp;

* The corporation and its shareholders reported their income consistent with S status for the tax year the election should have been made and for every subsequent year; and

* The corporation did not receive notification from the IRS regarding any problem with S status within six months of the date that Form 1120S, U.S. Income Tax Return for an S Corporation, for the first year, was timely filed.

Rev. Proc. 2003-43 provides, in part, a simplified method to request relief for a late election where the entity fails to qualify as an S corp solely because it failed to timely file the election with the applicable IRS "campus" (formerly "service center").

Under this revenue procedure, certain entities may be granted relief for failing to file timely elections if the request for relief is filed within 24 months of the election's due date. Rev. Proc. 2007-62 supplements Rev. Proc. 2003-43.

Entity Classification Elections

Regs. Sec. 301.7701-2(a) defines a "business entity" as any entity recognized for federal tax purposes that is not properly classified as a trust or otherwise subject to special IRC treatment.

Regs. Sec. 301.7701-3(a) provides that a business entity not classified as a corporation under various provisions in Regs. Sec. 301.7701-2(b) is an "eligible entity" and can elect its classification for federal tax purposes.

Under Regs. Sec. 301.7701-3(b)(1), unless the entity otherwise elects, a domestic eligible entity is:

* A partnership -- if it has two or more members; or

* Disregarded as an entity separate from its owner -- if it has a single owner.

Regs...