eligible subsidiary with a valid QSub election may have such status inadvertently terminated if its parent’s S election terminates or if the subsidiary ceases to qualify as a QSub. B. Overview of Relief Under Section 1362(f) Section 1362(f) provides if an S election or QSub election is not effective by reason of the failure of the electing entity to satisfy the applicable requirements or to obtain the shareholder consents required for a valid election, or if such election is terminated, then, notwithstanding the circumstances resulting in such ineffective election or termination, the entity will be treated as an S corporation or QSub, as applicable, during the period specified by the Secretary of the Treasury, if three requirements are satisfied: First, the Secretary must determine that the circumstances resulting in the ineffective election or termination were inadvertent. Second, no later than a reasonable time after discovery of the circumstances resulting in the ineffective election or termination, steps must be taken to qualify as an S corporation or QSub, as applicable, or to obtain the required shareholder consents. Third, the entity for which the election was made and each shareholder must agree to make adjustments as required by the Secretary. C. Relief for Inadvertently Invalid Elections & Terminations Under Rev. Proc. 2022-19 Rev. Proc. 2022-19 identifies six areas for which common issues involving inadvertently invalid elections or terminations for S corporations or QSubs may be resolvable without a PLR. 1. Agreements With No Principal Purpose to Circumvent One Class of Stock Requirement An S corporation can have only one class of stock and will generally be treated thus if all outstanding shares confer identical rights to distribution and liquidation, considering provisions in the S corporation’s governing documents relating to distribution and liquidation. The Treasury Regulations identify a number of agreements and arrangements between or among an S corporation and its shareholders that may or may not be treated as creating a second class of stock, depending in part on whether a principal purpose of the arrangement is to circumvent the one class of stock requirement, or otherwise alter shareholders’ rights to distribution and liquidation proceeds. These arrangements include: (i) buy-sell agreements among shareholders, agreements restricting the transferability of stock, and redemption agreements; (ii) instruments, obligations, or arrangements treated as equity under general principles of federal tax law; (iii) short-term unwritten advances that fail a safe harbor set forth in the regulations; and, (iv) obligations of the same class that are considered equity under general principles of federal tax law but fail a safe harbor set forth in the regulations. Section 3.01 of Rev. Proc. 2022-19 provides that the aforementioned agreements and arrangements will not be deemed governing provisions and will not be treated as a second class of stock, so long as there is no principal purpose to use the agreement or arrangement to circumvent the one class of stock requirement. S corporations do not need to seek relief from the IRS for entering into these specific agreements or arrangements described in the regulations, and the IRS will not issue PLRs in such situations. 2. Governing Provisions That Provide for Identical Distribution & Liquidation Rights A “disproportionate distribution” is any distribution of property by an S corporation to its shareholders that differs in timing or amount from distributions with respect to other shares. An S corporation is generally not treated as having more than one class of stock so long as its governing provisions provide for identical distribution and liquidation rights for all shares; however, actual distributions that differ in timing and amount should be given “appropriate tax effect in accordance with the facts and circumstances” under the applicable Treasury Regulations. The IRS reports taxpayer confusion regarding when (and how) actual distributions will be given “appropriate tax effect,” notwithstanding governing provisions providing for identical distribution and liquidation rights. Section 3.02 of Rev. Proc. 2022-19 provides that the IRS will not treat disproportionate distributions as violating the one class of stock requirement, so long as an S corporation’s governing provisions provide for identical distribution and liquidation rights. S corporations do not need to seek relief from the IRS for disproportionate distributions and the IRS will not issue PLRs in these situations. 3. Procedure for Correcting Inadvertent Errors on Form 2553 or Form 8869 An inadvertent error or omission on Form 2553 or Form 8869 will not generally invalidate an S election or QSub election, unless the error or omission is with respect to: (i) a shareholder consent; (ii) selection of permitted year; or, (iii) an officer’s signature. The Treasury Regulations and previously issued Revenue Procedures provide relief for missing shareholder consents. Rev. Proc. 2013-30 provides relief for inadvertent errors regarding permitted year and for the missing signature of an authorized officer on Form 2553 or Form 8869. Section 3.03 of Rev. Proc. 2022-19 provides that errors and omissions on Form 2553 or Form 8869, other than the foregoing, may be corrected with an appropriate explanation in writing submitted to the IRS. The IRS will not issue PLRs in these situations. 4. Procedure for Verifying S Elections or QSub Elections Generally, within 90 days after the IRS receives Form 2553, the IRS will mail a CP261 Notice to the filer. For Form 8869, within 60 days, the IRS will mail a CP279 Notice to the filer and a CP279A Notice to the subsidiary. A lack of written acknowledgement from the IRS may create uncertainty for taxpayers regarding the validity of their S election or QSub election, though the lack of written acknowledgement does not affect election validity. 13 www.nescpa.org
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