In PLR 200834007 (released August 22, 2008) the Service concluded that an S Corporation's election to be treated as an S corporation was terminated inadvertently. Here are the facts.
The corporation was formed on "a" and elected S corporation treatment. At the time the shareholder was "A" who owned the stock directly and indirectly through a wholly-owned LLC (a disregarded entity for tax purposes).
On a later date ("b") "A" sold his LLC interest to "B" and "C" which caused the LLC to no longer be a disregarded entity and an ineligible shareholder.
The corporation represented to the IRS that the S election termination was inadvertent and not motivated by tax avoidance or retroactive tax planning. The corporation and its shareholders agreed to make such adjustments as required by the Service to treat the company as an S corporation.
The IRS ruled the termination was inadvertent and the corporation would continue to be treated as an S corporation from date "b." The ruling is contingent on A, B, and C being treated as owning the corporation's stock held by the LLC in proportion to their ownership interests in the LLC on "b."
-Marc Ward
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