Documenting significant events in the life history of a business can have a critical impact on a number of important tax-related scenarios. One all too common occurrence involves maintaining documentation to establish the proper filing of an election to be treated as an S corporation. This can be important in a number of contexts; for example, questions raised by a potential buyer during sale-related due diligence.
Some would argue that filing tax returns as an S corporation without IRS challenge for a number of years should be sufficient proof that a valid S election has been made, even if paperwork substantiating the original proper S election filing cannot be located. Relying on such reasoning may give comfort to current owners, but a potential buyer may seek some purchase price concession to cover his concerns that he may inherit an issue not of his making. The original S election, in many cases, may only be part of an issue relating to S status. Where stock ownership involves trusts or a corporate organizational structure includes S subsidiary entities, further documentation can be just as important.
If a search for appropriate documentation uncovers oversights relating to required filings, all is not lost. The IRS provides relief procedures that allow oversights to be rectified. These provisions have been consolidated in Revenue Procedure 2013-30 issued last year, in which relief is provided to taxpayers who failed to timely file certain elections, including S elections, qualifying S trust elections, and qualifying S subsidiary elections.
In order to qualify for Rev. Proc. 2013-30 relief, all of the following requirements must be met:
- The entity requesting relief must have intended to be treated as an S corporation, a qualifying S trust, or a qualifying S subsidiary ("QSub") on the date on which the election was to be effective.
- The entity must request relief within three years and 75 days from the intended effective date.
- The failure to qualify for the intended status must solely be due to untimely filing of the required election.
- The taxpayer must demonstrate that reasonable cause existed for the failure to timely file the original election and is now acting diligently to correct such oversight upon its discovery.
If more than three years and 75 days have elapsed since the intended original effective date of an S election, relief may still be available if the corporation and all of its shareholders have properly reported income consistent with S corporation status for each year in which the S election was to have been applicable.
We recommend that private company owners operating their businesses as S corporations periodically carry out an internal document review process to confirm that timely filing of S and related elections have been made. If weaknesses in existing documentation are found, this matter should be reviewed with the company's tax advisor to determine the appropriate remedial action. It generally will be better to resolve such issues outside the time constraints and pressures of a sale or other event for which such issues may be relevant.
Michael R. Viens is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.
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