Making it Easier to Fix Blown S Elections

Making it Easier to Fix Blown S Elections

By Scott A. Dondershine

December 12, 2022

S corporations are required to have one class of equity, i.e., each share/unit must have the same “pro rata” rights. 

Some entities mistakenly adopt an operating or shareholders agreement containing clauses that allocate profits and losses, or make distributions, on a non-pro rata basis. Examples include (a) any requirement to maintain capital accounts pursuant to the Section 704(b) rules that apply to partnerships and (b) providing exceptions whereby profits are first allocated to members having negative capital account balances upon dissolution. 

The faulty provisions invalidate (or blow-up) an S election causing significant tax issues. Up to now, entities had to file for a Private Letter Ruling (PLR) to remedy a blown S election.  Fortunately, IRS recently issued Rev. Proc. 2022-19, 2022-41 I.R.B. 282 making it easier for taxpayers to obtain relief but only if done before IRS discovers the issue.  A PLR may still be needed if the Revenue Procedure does not apply. 

We anticipate that many taxpayers will take advantage of the easier method of obtaining relief provided by Rev. Proc. 2022-19.  For more information click here. Link

DISCLAIMER. This Client Alert does not provide legal advice. We are providing it for general informational purposes only.