Is your S election really late.

• Author: Loychik, Lisa
• Position: S corporation tax election

For many years the IRS has been denying taxpayers S status when their S elections were not timely filed. Previously, when taxpayers requested relief based on a legitimate reasonable cause argument, they were flatly turned down by the Service. The IRS'S position was that the deadline for filing an S election was statutory and could not be waived.

In 1996, Congress finally gave taxpayers an opening. Under the Small Business Job Protection Act of 1996 (SBJPA), Sec. 1362(b)(5) was added, granting the Service the authority to treat any election not timely filed as timely made, if the IRS determined there was reasonable cause for such failure.

Since the enactment of the SBJPA, the Service has issued notices and revenue procedures providing methods to obtain expedited waiver approval. Two of the most recent are Rev. Procs. 9740 and 97-48. Rev. Proc. 97-48 granted automatic relief if a taxpayer's facts met certain criteria. (Rev. Proc. 97-48 was discussed in detail in the May 1998 issue of The Tax Adviser, p. 309.)

Under Rev. Proc. 97-40, the IRS is not so generous. This procedure replaces the letter ruling approach of Sec. 1362(b)(5). Relief is provided only if certain factual criteria are met and the taxpayer establishes to the Service's satisfaction that reasonable cause leading to the taxpayer's failure to timely file its perfected S election existed. Rev. Proc. 97-40 applies only to corporations that have not filed a timely S election in accordance with Sec. 1362(a)(1) and (2). In addition, the following requirements must be met for a corporation to be eligible for relied

1. The corporation must otherwise qualify as an S corporation in accordance with the provisions of Sec. 1361;

2. Tile corporation must file a perfected S election within six months of the original due date under Sec. 1362(b)(2); and

3. The due date (excluding extensions) for the tax return for the first year the corporation intended to be an S corporation must not have passed.

To request relief under this procedure, a corporation must file with the applicable IRS service center a completed Form 2553, Election by a Small Business...