Section 3.04 of Rev. Proc. 2022-19 provides that a replacement acknowledgement letter may be requested by an S corporation or its shareholders by contacting the IRS Business and Specialty Tax Line, and by practitioners by contacting the IRS Practitioner Priority Service. The IRS will not issue PLRs in these situations. 5. Procedure for Addressing Inconsistent Federal Income Tax Returns An S corporation or QSub may occasionally file a federal tax return that is inconsistent with its S corporation or QSub status. This may create complications for the filer but will not generally affect the validity of the S election or QSub election. Section 3.05 of Rev. Proc. 2022-19 provides that an S corporation or parent S corporation of a QSub that files a federal income tax return inconsistent with S corporation or QSub status, as applicable, should file a corrected or amended return. The IRS will not issue PLRs in these situations. 6. Procedure for Retroactively Correcting Non-Identical Governing Provisions An S corporation with governing provisions that provide for only one class of stock, with identical rights to distribution and liquidation proceeds, and which S corporation has not entered into any agreement or arrangement treated as a second class of stock, is referred to as having “identical governing provisions.” Conversely, a “non-identical governing provision” will result in an S corporation having more than one class of stock. An entity cannot make a valid S election while it has more than one class of stock, and an initially valid S election may terminate if its governing provisions later provide for more than one class of stock. Section 3.06 of Rev. Proc. 2022-19 provides that, notwithstanding the foregoing, an S corporation and its shareholders can obtain relief for an S election that is invalid or terminated solely as the result of non-identical governing provisions, and the S corporation will be treated as having a valid election from the date such provisions were first adopted. Retroactive relief is available if an S corporation: (i) has or had one or more non-identical governing provisions; (ii) did not make any disproportionate distributions to shareholders during the time period when the non-identical governing provisions were in effect; (iii) timely filed Form 1120-S for each taxable year during the relevant period; and (iv) before the non-identical governing provisions are discovered by the IRS, satisfies certain corrective procedures. To obtain retroactive relief for non-identical governing provisions under Rev. Proc. 2022-19, an S corporation must complete a “Corporate Governing Provision Statement” that satisfies the requirements of the Revenue Procedure. Among other requirements, the Corporate Governing Provision Statement must provide relevant information about the S corporation, its intended S election, and its shareholders and must explain the circumstances surrounding the adoption, discovery, and correction or removal of the non-identical governing provisions. The S corporation must also complete a Shareholder Statement, which must contain certain information about the S corporation and its shareholders. An S corporation that does not qualify for corrective relief pursuant to the procedures set forth in Section 3.06 of Rev. Proc. 2022-19 may request a PLR. D. Conclusion There are many traps for the unwary concerning S corporations and QSubs. Fortunately, not all inadvertent mistakes require a PLR. Rather, the Revenue Procedures set forth various situations that can be rectified through simple processes. To maintain compliance, practitioners should ensure that entities electing to be taxed as an S corporation or QSub do not violate one or more of the S corporation requirements, either in practice or via their governing documents. If a violation is discovered, practitioners should ensure that their client takes the proper steps to resolve the matter in a timely manner. Hannah Fischer Frey is a partner and Katie R. Wunderlich is an associate at Baird Holm LLP. Fischer Frey focuses her law practice in the areas of federal and state income tax law and business succession planning. Wunderlich’s practice focuses on tax-exempt matters, estate planning, corporate transactions, and federal and state tax planning issues. For more information, contact Fischer Frey or Wunderlich at hfrey@bairdholm.com or kwunderlich@bairdholm.com, respectively. To maintain compliance, practitioners should ensure that entities electing to be taxed as an S corporation or QSub do not violate one or more of the S corporation requirements, either in practice or via their governing documents. 14 Nebraska CPA
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