United States

S corporations seeking termination relief subject to hefty user fee

IRS may limit circumstances where it will consider requests

TAX ALERT  | 

When the IRS released its updated ruling request procedures earlier this week, one item that was notably missing was any change to the user fees applicable to S corporations that request relief from inadvertent terminations of existing subchapter S elections. Those user fees are unchanged from the prior year—remaining at $28,300.

An S corporation may be required to request this relief in situations where it inadvertently triggers a termination. For example, transfers of shares to an ineligible shareholder, issuing a second class of stock, and failing to make the appropriate election when a shareholder transfers shares to certain trusts are all events that will terminate a corporation’s subchapter S status. The IRS will often grant relief from these oversights, but will require that taxpayers request relief—and pay the $28,300 user fee—to get that relief.

There was some thought that the IRS might reconsider that fee after The American Institute of Certified Public Accountants (AICPA) provided comments to the IRS in May 2016 noting that a reduced fee was appropriate given the relatively routine nature of the requests. However, the IRS chose not to create a separate fee category for these requests, leaving the fee unchanged at $28,300—the same as other ruling requests.

In fact, an IRS official signaled in late December that the IRS likely will start to limit the circumstances under which it will even consider taxpayers’ requests for a private letter rulings in this area. The official suggested that the IRS will only consider requests where an S corporation has clearly terminated its election—for example, by transferring shares to an ineligible shareholder. But it will no longer issue rulings in many situations where it might be unclear whether the election might have been compromised—for example, where an entity’s governing documents require distributions that are in proportion to stock ownership, yet the entity inadvertently makes disproportionate distributions.

This appears to be a signal that the IRS believes taxpayers are being unnecessarily cautious with these requests, particularly in situations where a company is trying to prove to a potential buyer that its subchapter S status is intact. Although this change in policy is unofficial at this point, it is possible that official guidance to this effect could be released later this year. This change in policy will be important for taxpayers—particularly buyers and sellers—to consider as they structure deals prospectively that involve S corporations.

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