S Corporation Corner: Practitioners Should Schedule Periodic Check-ups By Stuart J. Frentz


Originally published in the JOURNAL OF PASSTHROUGH ENTITIES - March–April 2012.

The number of inadvertent termination and inadvertent invalid S election rulings the IRS continues to issue each year suggests there are opportunities for tax professionals to provide more and better services to their clients aimed at monitoring and maintaining their S elections. Several recent rulings point out that the inadvertent terminationat issue was first discovered when a sale of the corporation was under negotiation. Unfortunately, problems giving rise to requests for relief under Code Sec. 1362(f) are commonly detected during the due diligence preceding an acquisition.

The unintentional loss of an S election is serious whenever it occurs, but discovering an inadvertent termination during the due diligence leading up to the sale of an S corporation can be disastrous. When the validity of the target’s S election is critical, as often is the case, the transaction may have to be delayed for four to six months or longer while the parties seek inadvertent termination relief from the IRS through the ruling process. If the IRS refuses to issue an acceptable ruling, the terms of the deal may have to be re-negotiated, or the transaction may fall apart completely. The discovery of a defect in the S election while a transaction is pending is akin to having the family automobile break down during a vacation trip up the Alaska Highway. Preventive maintenance can go a long way toward avoiding both kinds of disappointment (or worse).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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