Selecting the proper due date for filing an S election.

• Author: Ellentuck, Albert B.

Facts

Zarco is a newly formed corporation that intends to elect S status. The corporation was formed and began doing business on Jan. 5, 1991. The management has been busy with the corporation's startup and only recently contacted its tax adviser. It met on Mar. 18, 1991 and the S election was signed and postmarked on Mar. 19, 1991.

Issue

Has Zarco made a timely S election for the current year?

Analysis

To be currently effective, an S election must be made --during the preceding year, or --on or before the fifteenth day of the third month of the present year.

Following Prop. Regs. Sec. 1.1362-1(c), the election must occur on or before the date when two months and 15 days have elapsed from the beginning of a new corporation's first tax year, rather than literally the fifteenth day of the third month. Under this interpretation, Zarco's S election for its first year must be filed after Jan. 4, 1991 and before Mar. 20, 1991.

With a newly formed corporation, a practitioner faces two potential restrictions. Filing the S election before corporate formation: An S election is not valid if the corporation does not exist when the election is filed. Under Prop. Regs. Sec. 1.1362-1(e), Example (1), an election made earlier than the beginning of the first tax year will not be valid.

Prop. Regs. Sec. 1.1362-1(c)(3) states that the time for making the S election for a newly formed corporation begins on the date the corporation has shareholders, acquires assets or begins doing business, whichever occurs first. In Rev. Rul. 72-257, the IRS looked to the law of the state in which the incorporation had occurred to determine the start of corporate legal existence.

Since laws many vary from state to state, an S election should not be filed before the corporation has achieved legal existence under state law. This is true not only with a new business venture but also with the incorporation of an existing proprietorship or partnership. The S election for such entities should not be filed before the incorporation date; an existing C corporation, however, may file its S election up to a year in advance of its conversion. Measuring the 2 1/2-month election period: For a newly formed corporation, it may be difficult to determine its proper origination date. Prop. Regs. Sec...