Obtaining a waiver of an invalid S election.

AuthorEllentuck, Albert B.

The IRS has authority to waive the effect of an invalid election. When an S corporation election is ineffective because the corporation failed to qualify as a small business corporation, or obtain shareholder consents, the corporation will be treated as an S corporation during the period specified by the IRS if all of the following conditions are met (Sec. 1362(f)):

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  1. The IRS determines that the circumstances resulting in the ineffective election were inadvertent.

  2. "Within a reasonable period after discovering the circumstances causing the invalidity, steps are taken to qualify the corporation as a small business corporation or to obtain the requisite shareholder consents (including elections for QSSTs and ESBTs).

  3. During the period that the S election was ineffective, the corporation and each shareholder agree to adjustments required by the IRS pertaining to that period.

    The IRS has provided the following ways to obtain relief from invalid elections:

  4. Extension of time to obtain consents under Regs. Sec. 1.1362-6. If the S election is invalid because shareholder consents were omitted, Regs. Sec. I.l362-6(b)(3)(iii) provides that the S corporation can request an extension of time to furnish the consents. No user fee is required.

  5. Relief from late election under Rev. Proc 2007-62. If the election is late, relief is provided under Rev. Proc. 2007-62, which allows the S corporation to file a late Form 2553, Election by a Small Business Corporation, along with the corporation's first S corporation income tax return. Under Rev. Proc. 2007-62, a corporation can obtain relief from filing a late S election if a request for relief is filed no later than six months after the original due date (excluding extensions) of the Form 1120S, U.S. Income Tax Return for an S Corporation, for the year the election was first intended. The S corporation must show reasonable cause why the election was not filed in a timely manner. No user fee is required.

  6. Relief from late election under Rev. Proc. 2003-43. If the S election is late, relief is provided under Rev. Proc. 2003-43, which allows the S corporation to file Form 2553 even though the due date has passed. Under Rev. Proc. 2003-43, a corporation can obtain relief for failing to file an S election if a request for relief is filed within 18 (or, in certain cases, 24) months of the original due date of the S election. The S corporation must show reasonable cause why the election was not...

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