Late election relief under Rev. Procs. 97-48 and 98-55.

Currently, Rev. Procs. 97-48's and 98-55's automatic change provisions cover seven types of late S election problems. Relief is also possible under Sec. 1362(f); however, this analysis discusses avenues available only under Rev. Procs. 97-48 and 98-55, which offer limited filing relief without a user fee.

Rev. Proc. 97-48

While Rev. Proc. 97-48 is limited, it is the only current route for automatic approval of a late S election. Section 4.01 addresses situations in which the sole reason for a late S election is failure to file Form 2553, Election by a Small Business Corporation (under section 1362 of the Internal Revenue Code). This frequently occurs when the taxpayer, accountant and attorney each thought that someone else was preparing the form. To qualify for relief under section 4.01, a corporation and its shareholders must have reported their income consistent with a valid S election for the initial year in question and all subsequent years. If the IRS failed to notify either the corporation or any of the shareholders of a problem within six months of the initial S return filing, automatic approval is available.

Section 4.02 provides for automatic approval when a taxpayer intended to become an S corporation for a year beginning before 1997 and did not timely file Form 2553. This fact pattern, however, is somewhat dated for today's needs. In this case, the Service would accept an S status change, but only prospectively the following tax year. A further condition states that a taxpayer must file a C corporation return for this period, then begin filing as an S corporation in the following tax year. All shareholders must have filed in accordance with this status for each year, and the oldest year must be open under the statute of limitations. If the corporation and all shareholders agree to amend the year(s) covered by the last C corporation filing, automatic relief is available.

Rev. Proc. 98-55

Rev. Proc. 98-55 supersedes Rev. Procs. 94-23 and 97-40, and is the general rule for late S election relief without a letter ruling. Unlike Rev. Proc. 97-48, relief is not automatic, but is based on the IRS's acceptance of a reasonable cause for the late election. Section 4.01 provides that, if the failure to file Form 2553 is the only problem, a late filing is acceptable if done by the due date of the first S filing (without extensions). As with all relief situations under Rev. Proc. 98-55, a statement of reasonable cause for failure to timely file Form 2553 is required.

Section 4.02 involves the situation in which the failure to timely file the Form 2553 is compounded by a failure of a trust shareholder to qualify either as an electing small business trust (ESBT) or as a qualified subchapter S trust (QSST) on the S corporation's first day, or by a failure to qualify as a qualified subchapter S subsidiary (QSub). In either case, the Service will consider a late S election if Form 2553 is filed by the due date of the S year in question (without extensions). A reasonable cause statement must explain both the late Form 2553 filing and the late QSub, QSST or ESBT election.

Section 5.01 applies to a QSub when the parent's S election was timely, but the QSub's election was not. The due date of the return (without extensions) that includes QSub activity must not have passed. Filing for relief does not involve Form 2553, but the QSub election should be marked "FILED PURSUANT TO REV. PROC. 98-55." A reasonable cause statement must also be attached.

Finally, section 6.01 provides assistance when an S election was invalidated or terminated solely because an ESBT or QSST election was not made for a trust shareholder. Relief must be requested within 24 months of the election due date, with the affected taxpayers' returns reflecting a valid election. Considerable statements and affidavits must accompany the late QSST or ESBT election.

The flow chart provided in Rev. Proc. 98-55 outlines the basic thought process of available S election relief and is very useful.

FROM R. MILTON HOWELL, III, CPA, DAVENPORT, MARVIN, JOYCE & Co., L.L.P., GREENSBORO/BURLINGTON/ SANFORD, NC