Automatic relief for certain late S elections.

In Rev. Proc. 97-48, the Service offers two situations in which late S elections will be treated as timely made.

Situation 1

A corporation falls to qualify as an S corporation solely because its Form 2553, Election by a Small Business Corporation (Under section 1362 of the Internal Revenue Code), was not filed timely; the corporation intended to be an S corporation; 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; at least six months had elapsed since the date on which the corporation filed its tax return oil Form 1120-S, U.S. Income Tax Return for an S Corporation, for the first year the corporation intended to be all S corporation; and the Service has not notified the corporation or any of its shareholders of any problem with its S status.

Procedural Requirements for Automatic Relief

The corporation must file with the applicable service center (or district director if under examination) a completed Form 2553, signed by an officer of the corporation authorized to sign and all persons who were shareholders at any time during the period that the corporation intended to be an S corporation. The Form 2553 must state at the top of the document "FILED PURSUANT TO REV PROC. 97-48." Attached to the Form 2553 must be a dated declaration signed by a corporate officer and all persons who were shareholders at any time during the period that the corporation intended to be an S corporation, attesting that:

A. The corporation and the shareholders reported their income (on all affected returns) consistent with S status for the year the S election should have been made, and for every subsequent tax year; and

B. "Under penalties of perjury, to the best of my knowledge and belief, the facts presented in support of this election are true, correct, and complete."

Situation 2

For periods prior to Jan. 1, 1997, the corporation intended to be an S corporation. Because of a late S election, the corporation was notified by the IRS that it was not permitted to be an S corporation for the first tax year specified in the election (i.e., late S election relief was not available during this period); the corporation failed to qualify as an S corporation solely because the Form 2553 was not filed timely for a tax year that began prior to Jan. 1, 1997.

The corporation received notification from the Service that the Form 2553 was late and therefore the corporation was not permitted to be an S corporation for the first tax year specified in the election and that it had to file as a C corporation for the first tax year it intended to be an S corporation, which would be effective for the next tax year; the corporation and the shareholders treated the corporation as a C corporation for the first tax year the corporation intended to be an S corporation and as an S corporation for all succeeding years; and the statute of limitations for all relevant tax years for both the shareholders and corporation was open.

Procedural Requirements for Automatic Relief

The corporation must file with the applicable service center (or district director if under examination) a completed Form 2553, signed by an officer of the corporation authorized to sign and all persons who were shareholders at any time during the period that the corporation intended to be an S corporation. The Form 2553 must state at the top of the document "FILED PURSUANT TO REV PROC. 97-48." Attached to the Form 2553 must be a dated declaration signed by a corporate officer and all persons who were shareholders at any time during the period that the corporation intended to be an S corporation, attesting that:

A. The corporation and the shareholders reported their income (on all affected returns) consistent with the requirements for automatic relief under the above criteria (Section 4.02 of the revenue procedure);

B. The corporation and the shareholders agree to amend their tax returns for the first year and any other affected returns to reflect S status; and

C. "Under penalties of perjury, to the best of my knowledge and belief, the facts presented in support of this election are true, correct, and complete."

A corporation that satisfies the requirements for either of these situations will be deemed to have reasonable cause for the failure to file a timely S election and will automatically be granted relief to file the election for S status starting on the date it intended to have the S election become effective.

Summary

Rev. Proc. 97-48 does not apply when a qualified subchapter S trust election or an electing small business trust election is late. This revenue procedure replaces the letter ruling procedure used to obtain relief for a late S election under Sec. 1362(b)(5); see Rev. Procs. 97-1 and 97-40. If this revenue procedure is followed:

1. A corporation and its shareholders will be allowed to treat the corporation as an S corporation from the first tax year it intended to do so;

2. There is no user fee; and

3. Pending applications for relief from late-filed elections that meet the criteria above will come under the automatic provisions of this revenue procedure.

This revenue procedure is a welcome and practical application of the Service's administrative authority.