26 C.F.R. § 1.1362-4 Inadvertent terminations.
Title 26 - Internal Revenue
(a) In general. A corporation is treated as continuing to be an S corporation during the period specified by the Commissioner if— (1) The corporation made a valid election under section 1362(a) and the election terminated; (2) The Commissioner determines that the termination was inadvertent; (3) Steps were taken by the corporation to return to small business corporation status within a reasonable period after discovery of the terminating event; and (4) The corporation and shareholders agree to adjustments that the Commissioner may require for the period. (b) Inadvertent termination. For purposes of paragraph (a) of this section, the determination of whether a termination was inadvertent is made by the Commissioner. The corporation has the burden of establishing that under the relevant facts and circumstances the Commissioner should determine that the termination was inadvertent. The fact that the terminating event was not reasonably within the control of the corporation and was not part of a plan to terminate the election, or the fact that the event took place without the knowledge of the corporation, notwithstanding its due diligence to safeguard itself against such an event, tends to establish that the termination was inadvertent. (c) Corporation's request for determination of an inadvertent termination. A corporation that believes its election was terminated inadvertently may request a determination of inadvertent termination from the Commissioner. The request is made in the form of a ruling request and should set forth all relevant facts pertaining to the event including, but not limited to, the facts described in paragraph (b) of this section, the date of the corporation's election under section 1362(a), a detailed explanation of the event causing termination, when and how the event was discovered, and the steps taken to return the corporation to small business corporation status. (d) Adjustments. The Commissioner may require any adjustments that are appropriate. In general, the adjustments required should be consistent with the treatment of the corporation as an S corporation during the period specified by the Commissioner. In the case of a transfer of stock to an ineligible shareholder that causes an inadvertent termination under section 1362(f), the Commissioner may require the ineligible shareholder to be treated as a shareholder of an S corporation during the period the ineligible shareholder actually held stock in the corporation. Moreover, the Commissioner may require protective adjustments that prevent any loss of revenue due to a transfer of stock to an ineligible shareholder (e.g., a transfer to a nonresident alien). (e) Corporation and shareholder consents. The corporation and all persons who were shareholders of the corporation at any time during the period specified by the Commissioner must consent to any adjustments that the Commissioner may require. Each consent should be in the form of a statement agreeing to make the adjustments. The statement must be signed by the shareholder (in the case of shareholder consent) or a person authorized to sign the return required by section 6037 (in the case of corporate consent). See §1.1362–6(b)(2) for persons required to sign consents. A shareholder's consent statement should include the name, address, and taxpayer identification numbers of the corporation and shareholder, the number of shares of stock owned by the shareholder, and the dates on which the shareholder owned any stock. The corporate consent statement should include the name, address, and taxpayer identification numbers of the corporation and each shareholder. (f) Status of corporation. The status of the corporation after the terminating event and before the determination of inadvertence is determined by the Commissioner. Inadvertent termination relief may be granted retroactive for all years for which the terminating event was effective, in which case the corporation is treated as if its election had not terminated. Alternatively, relief may be granted only for the period in which the corporation again became eligible for subchapter S treatment, in which case the corporation is treated as a C corporation during the period for which the corporation was not eligible to be an S corporation. [T.D. 8449, 57 FR 55453, Nov. 25, 1992]
Title 26: Internal Revenue
PART 1—INCOME TAXES
Small Business Corporations and Their Shareholders
§ 1.1362-4 Inadvertent terminations.
