The numerous technical requirements for qualifying and maintaining status as an S corporation create many opportunities for loss of S corporation status. In recognition of this, the law provides that taxpayers may get relief from accidental terminations of a corporation’s S election if the termination is “inadvertent,” the corporation takes action to correct the termination within a reasonable time after discovery, and consents to certain adjustments required by the IRS.
By contrast, if an S corporation files a statement of revocation, the IRS generally does not allow the revocation to be rescinded unless the corporation files a rescission statement before the effective date of the termination. There appears to be no authority supporting the proposition that if a revocation was filed based on the mistake of fact or erroneous advice that the revocation can be considered inadvertent.
Could the corporation file a new S election? Generally, a corporation that terminates it’s S election may not file a new election until five years has lapsed. In certain circumstances, the IRS may grant permission to make a new election before the five-year period expires. However, this generally requires a showing that termination was not within the control of the corporation or its shareholders or that there has since been change in ownership of greater than 50%. There are a number of rulings in which the IRS refused to grant such relief where the basis for the revocation changed. In a 1978, letter ruling, the IRS denied permission for early election where a revocation was made on advice of attorneys or accountants which advice was subsequently determined to be in error.
Bottom Line: Think carefully before revoking an S election, as it will likely be permanent (or at least for 5 years).
“The word abbreviation sure is long for what it means.” – Zach Galifianakis