Revised procedures for relief from late S elections.

A recent revenue procedure provides a revised method for taxpayers to request relief for late S corporation elections, electing small business mast (ESBT) elections, qualified subchapter S trust (QSST) elections and qualified subchapter S subsidiary (QSub) elections. Generally, it provides that certain eligible entities may be granted relief for failing to file these elections timely if they file the request for relief within 24 months of the election due date. This procedure supersedes Rev. Proc. 98-55.

A corporation or trust that does not meet the requirements for relief or is denied relief under this procedure may submit a letter ruling requesting inadvertent termination, inadvertent invalid election or late-election relief (as appropriate). However, the Service will not ordinarily issue a letter ruling if the Sec. 6501(a) assessment limitations period has lapsed for any tax year for which an election should have been made or any tax year that would have been affected by the election had it been timely made. The procedural requirements for requesting a letter ruling are described in Rev. Proc. 2003-1 (or its successor).

Certain corporations may already be eligible for automatic late S corporation election relief pursuant to Rev. Proc. 97-48. Generally, relief is available under that procedure when (1) a corporation intends to be an S corporation; (2) the corporation and its shareholders reported their income consistent with S status for the tax year the S election should have been made and for every subsequent year; and (3) the corporation did not receive IRS notice about any problem with S status within six months of the date on which Form 1120S for the first year was timely filed. However, Rev. Proc. 97-48 does not provide relief for late ESBT, QSST or QSub elections.

Relief Under Rev. Proc. 2003-43

Relief is available under Rev. Proc. 2003-43 if:

1. The entity fails to qualify for its intended status as an S corporation, ESBT, QSST or QSub on the first day that status was desired, solely because of the failure to timely file the appropriate S election with the applicable service center;

2. Less than 24 months have passed since the original due date of the S election;

3. Either (i) the entity is seeking relief for a late S corporation or QSub election and it has reasonable cause for its failure to make the timely S election; or (ii) the S corporation and the entity are seeking relief for an inadvertent invalid S election or an inadvertent termination of an S election due to the failure to make a timely ESBT or QSST election and the failure to file the timely S election was inadvertent; and

4. All of the following requirements are met:

* The entity seeking to make the election has not filed a return (for QSubs, the parent has not filed a tax return) for the first year in which the election was intended;

* The application for relief is filed no later than six months after the electing entity's return due date (excluding extensions) (for QSubs, the due date of the parent's return) for the first year in which the election was intended; and

* No taxpayer whose tax liability or return would be affected by the S election (including all shareholders) has reported inconsistently with the S election (and any ESBT, QSST or QSub election), on any affected return for the year the election was intended; or (1) the entity seeking to make the election has filed a return (for QSubs, the parent has filed a return) for the first year in which the election was intended within six months of the return due date (excluding extensions); and (2) all taxpayers whose tax liability or returns would be affected by the S election (including all S shareholders) have reported consistently with the S election (and any ESBT, QSST or QSub elections), on all affected returns for the year the election was intended and any subsequent years.

Procedural Requirements

Tax return not filed for the first year of the intended S election: The entity may request relief for the late S election by filing the properly completed election form within 18 months of the original due date of the intended S election, but in no event later than six months after its return due date (excluding extensions) (for QSubs, the due date of the parent's return) for the first year in which the election was intended. The election form must state at the top of the document "FILED PURSUANT TO REV. PROC. 2003-43:" For S corporation or QSub elections, the taxpayer must attach a statement establishing reasonable cause for the failure to timely file the election. For ESBT or QSST elections, it must attach a statement establishing that the failure to file the S election was inadvertent.

Tax return filed for the first year of the intended S election: If the entity seeking the election has filed a return for the first tax year of the intended S election within six months of the return due date (excluding extensions), it may request relief for the late election by filing the properly completed election form(s) and the supporting documents described below. The election form(s) must be filed within 24 months of the original due date for the S election and must state at the top of the document" FILED PURSUANT TO REV. PROC. 2003-43" For S corporation or QSub elections, a statement must be attached to the election form establishing reasonable cause for the failure to timely file the election. For ESBT or QSST elections, a statement must be attached establishing that the failure to timely file was inadvertent.

Other Form Requirements

S corporations: An entity seeking relief for a late S corporation election must file a completed Form 2553, Election by Small Business Corporation, signed by an authorized corporate officer and all persons who were shareholders at any time during the period beginning on the first day of the tax year for which the election is to be effective and ends on the day the election is made. The completed election form must include the following:

* Statements from all the shareholders that they have reported their income (on all affected returns) consistent with the S corporation election for the year the election should have been made and for all subsequent years; and

* A dated declaration signed by an authorized corporate officer that states: "Under penalties of perjury, I declare that, to the best of my knowledge and belief, the facts presented in support of this election are true, correct, and complete."

ESBTs and QSSTs: The trustee of an ESBT or the current income beneficiary of a QSST must sign and file the appropriate election. The completed election form must include the following:

* A statement from the ESBT's trustee or the QSST'S current income beneficiary that includes the information required by Regs. Sec. 1.1361-1(m)(2)(ii) (for ESBT elections) or Regs. Sec. 1.1361-1(j)(6)(ii) (for QSST elections);

* For a QSST, a statement from the trustee that the trust satisfies the requirements of Sec. 1361(d)(3) and that the income distribution requirements have been and will continue to be met;

* For an ESBT, a statement from the trustee that all potential current beneficiaries meet the shareholder requirements of Sec. 1361(b)(1) and that the trust satisfies Sec. 1361(e)(1) requirements (other than the requirement to make an ESBT election);

* A statement from the ESBT trustee or the QSST current income beneficiary that the beneficiary or trustee acted diligently to correct the mistake on its discovery;

* Statements from all the shareholders during the period between the date the S election terminated or was to have become effective and the date the completed election was filed that they have reported their income (on all affected returns) consistent with the S election for the year the election should have been made and for all subsequent years; and

* A dated declaration, signed by the ESBT trustee or the QSST current income beneficiary, that states: "Under penalties of perjury, I declare that, to the best of my knowledge and belief, the facts presented in support of this election are true, correct, and complete."

QSubs: An S corporation seeking relief for a late QSub election for a subsidiary must file a completed Form 8869, Qualified Subchapter S Subsidiary Election. The completed election form must include:

* A statement that the corporation satisfies the QSub requirements of Sec. 1361(b)(3)(B), and that all QSub assets, liabilities and items of income, deduction and credit have been treated as belonging to the S corporation (on all affected returns) consistent with the QSub election for the year the election was intended and for all subsequent years;

* A dated declaration, signed by an authorized S corporation officer, that states: "Under penalties of perjury, I declare that, to the best of my knowledge and belief, the facts presented in support of this election are true, correct, and complete."

Effective Date

This procedure was generally effective on June 9, 2003 and is available to any entity that met the requirements as of that date. It applies to pending requests under Rev. Proc. 98-55 on June 9, 2003, and ones received thereafter. It also applies to all letter ruling requests pending in the National Office on June 9, 2003, and all future requests. To receive a refund for pending letter ruling requests, the entity must withdraw it prior to the earlier of July 24, 2003, or the issuance of the letter ruling.

REV. PROC. 2003-43, IRB 2003-23