Tax News

CCH (cch.taxgroup.com) reports:

  The IRS has clarified in two situations whether an entity, initially taxed as a partnership but becomes a corporation for tax purposes, is eligible to elect to be taxed as an S corporation effective for its first tax year as a corporation. In the first situation an unincorporated entity formed on the first day of Year 1 that is classified as a partnership for federal tax purposes elects, effective on the first day of Year 2, to be treated as an association that is taxed as a corporation for federal tax purposes. On the first day of the second month of Year 2, the entity files an election under Code Sec. 1362(a) to be taxed as an S corporation, effective on the first day of Year 2. Every person holding stock in the entity on the first day of Year 2 also holds stock at the time the S election is made.

  In the second situation, a calendar-year taxpayer, organized on the first day of Year 1 as an unincorporated entity that is classified as a partnership for federal tax purposes, converts into a corporation under a state law formless conversion statute, effective on the first day of Year 2. On the first day of the second month of Year 2, the entity files an election under Code Sec. 1362(a) to be taxed as an S corporation, effective on the first day of Year 2. As in the first situation, every person holding stock in the entity on the first day of Year 2 also holds stock at the time the S election is made.

  In both situations the entity is deemed to contribute all of its assets and liabilities to a corporation in exchange for stock and immediately thereafter liquidate by distributing the stock to its partners In both situations, the partnership's tax year is also deemed to end on the last day of Year 1, and the corporation's first tax year is considered to begin on the first day of Year 2. Thus, in neither situation will the partnership be deemed to own the stock of the corporation during any portion of the corporation's first tax year.

  When the unincorporated entity becomes a corporation for federal tax purposes on the first day of Year 2, it becomes eligible, in both situations, to elect to be taxed as an S corporation effective its first tax year. The partnership's tax year ends immediately before the close of the last day of Year 1, and the corporation's first tax year begins at the start of the first day Year 2. Accordingly, the corporation will not be deemed to have an intervening short tax year in which it was a C corporation.

Rev. Rul. 2009-15, 2009FED ¶46,363

Other References:

 
Code Sec. 1361

  CCH Reference - 2009FED ¶32,026.809

 
Code Sec. 1362

  CCH Reference - 2009FED ¶32.053.36

  CCH Reference - 2009FED ¶32,053.58

  Tax Research Consultant

  CCH Reference - TRC SCORP: 202
CCH Reference -
TRC SCORP: 204