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ourteen sections of the Internal agreement caused the LLC to have a

Fn Revenue Code are central to the Under second class of stock.
If a second-class-of-stock issue ex-
taxation of Subchapter S corporations ists, it may be possible, as the taxpayer
and their shareholders. Over the 12- Sec. 1362(a)(2), in this case did, to obtain Sec. 1362(f)
each person who
month period ending February 2022, relief from the IRS through the private
some of these sections and others owns stock on the letter ruling process for an inadvertently
date the corporation
affecting S corporations have been invalid S election or an inadvertent
addressed by recent legislation, court files its S election termination of an initially valid elec-
cases, and IRS guidance. The AICPA tion. However, that relief generally
must be sought at the time the issue
S Corporation Taxation Technical must consent to is discovered.
the election.
Resource Panel, a volunteer group of
practitioners who pay close attention Sec. 1362: Election;
to matters affecting S corporations and letter ruling released March 12, 2021,1 revocation; termination
their shareholders, offers the following the IRS addressed the issue of whether Sec. 1362 describes the procedures for
a limited liability company (LLC) that electing or revoking S corporation status.
summary of recent developments
elected S corporation status had just one It also states some rules for terminating
relating to this tax area. The items are
class of stock for purposes of Sec. 1361. S corporation status if the corpora-
arranged by Code section and often The focus of the letter ruling was on the tion fails to meet one or more of the
contain a short description of the provisions of the LLC’s operating agree- eligibility requirements of Sec. 1361.
relevant provision. ment and whether they created a second Sec. 1362(g) contains a restriction that
class of stock. The operating agreement prevents a former S corporation from re-
Sec. 1361: S corporation included partnership provisions that ap- electing S corporation status for five tax
defined plied irrespective of whether the entity years unless the IRS consents to a new
Sec. 1361(b) lists several conditions that was a partnership or S corporation. election. An often-used provision within
are necessary for a corporation to be For instance, one part of the operating this section provides relief in certain
eligible for S corporation status. Among agreement provided that in the event the cases where S corporations have failed
these are a limitation on the number LLC might be liquidated “within the to meet eligibility requirements, either at
of shareholders at any given time; a meaning of § 1.704-1(b)(2)(ii)(g) of the the time of the S corporation election or
restriction of eligible shareholders to Income Tax Regulations,” then liquidat- after the election took effect.
individuals, estates, and certain trusts; ing distributions “shall be made to the Reduced user fee for private
and the requirement that there may members who have positive capital ac- letter rulings: In Rev. Proc. 2022-1,
only be one class of stock outstanding. counts in compliance with § 1.704-1(b) the IRS reduced the user fee for private
There are also specified ineligible cor- (2)(ii)(b)(2).” letter rulings seeking late S corpora-
porations, but these are limited to certain In the letter ruling, the IRS con- tion election relief. Requests under Sec.
banks, life insurance companies, domestic cluded that the terms of the operating 1362(b)(5) for an extension of time
international sales corporations (DISCs) agreement created a second class of for making an S corporation election
or former DISCs, and corporations that stock for the S corporation. Although are now subject to the same user fee
have terminated S corporation or quali- the letter ruling does not describe as requests for relief under Regs. Sec.
fied Subchapter S subsidiary status within whether the provision above would have 301.9100-3: that is, $12,600.2 However,
the past five years. The statute does not resulted in a liquidating distribution that there are reduced fees for taxpayers
specifically address other entities, such as was not proportionate to ownership, the whose “gross income” does not exceed
not-for-profit corporations. IRS appears to have concluded that the certain levels. The reduced fee is $3,000
Second class of stock created mere existence of the partnership provi- if the gross income is less than $250,000.
by LLC operating agreement: In a sions described above in the operating If the gross income is at least $250,000

1. IRS Letter Ruling 202110010. 2. Rev. Proc. 2022-1, Appendix A (Schedule of User Fees), clause (A)(3)(c)(i).

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