IRS written determination 201545012

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201545012
Release Date: 11/6/2015
Index Number: 1362.04-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
---------------------, ID No. ------------------
Telephone Number:
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Refer Reply To:
CC:PSI:B01
PLR-106494-15
Date:
July 28, 2015
Legend
X=--------------------------------------
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State=-----------
Date 1=-----------------------
Date 2=-----------------------
Date 3=--------------------------
Date 4=-----------------------
Date 5=-------------------
Date 6=-------------------------
$N1=----------
Class A=------------------------------------------------------------------------------------------
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Class B=------------------------------------------------------------------------------------------
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Dear ---------------:

PLR-106494-15
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This letter responds to a letter dated January 29, 2015, and subsequent
correspondence, written on behalf of X, requesting a ruling under § 1362(f) of the
Internal Revenue Code.
Facts
The information submitted states that X was formed as a Statelimited liability
company prior to Date 1, and made an election to be treated as an S corporation
effective Date 1.
X's operating agreement was amended and restated as of Date 2, to authorize
the issuance of new classes of membership interests in X. The shares held by the
original memberswere classified as Class Aunits. The amended operating agreement
provided that a holder of the Class Aunits would each receive a $N1 preferential
distribution right over the Class Bunit holders, and would hold the sole voting rights.
Class Bunit holders would share in the distributions after the preferential distributions
on a pro rata basis with the Class Aunit holders.
At the time that the operating agreement was amended, the original members
exchanged their ownership interests for Class Aunits. Beginning on Date 3through
Date 4, X issued interests in the Class Bunits to various persons.
In Date 5, X amended its operating agreement to eliminate the Class Apreferred
distribution rights and to provide that the Class Bunit holders have distribution rights
that are identical to the distribution rights that the Class Aunit holders have. On Date6,
X made corrective distributions to eliminate the effect of the ClassA preferred
distribution rights.
X represents that it was not aware that issuing new classes of stock with differing
distribution rights to shareholders could terminate X's S corporation election. X
represents that any termination of its S corporation election was not motivated by tax
avoidance or retroactive tax planning. X and its shareholders agree to make any
adjustments consistent with the treatment of X as an S corporation, as might be
required by the Secretary.
Law and Analysis
Section 1361(a)(1) provides that the term “S corporation” means, with respect to
any taxable year, a small business corporation for which an election under § 1362(a) is
in effect for such year.
Section 1361(b)(1) provides that the term “small business corporation” means a
domestic corporation which is not an ineligible corporation and which does not (A) have
more than 100 shareholders, (B) have as a shareholder a person (other than an estate,

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a trust described in § 1361(c)(2), or an organization described in § 1361(c)(6)) who is
not an individual, (C) have a nonresident alien as a shareholder, and (D) have more
than one class of stock.
Section 1.1361-1(l)(1) provides, in part, that a corporation that has more than one
class of stock does not qualify as a small business corporation. Except as provided in
§ 1.1361-1(l)(4) (relating to instruments, obligations, or arrangements treated as a
second class of stock), a corporation is treated as having only one class of stock if all
outstanding shares of stock of the corporation confer identical rights to distribution and
liquidation proceeds. Differences in voting rights among shares of stock of a corporation
are disregarded in determining whether a corporation has more than one class of stock.
Section 1.1361-1(l)(2)(i) provides, in part, that the determination of whether all
outstanding shares of stock confer identical rights to distribution and liquidation
proceeds is made based on the corporate charter, articles of incorporation, bylaws,
applicable state law, and binding agreements relating to distribution and liquidation
proceeds (collectively, the governing provisions). A commercial contractual agreement,
such as a lease, employment agreement, or loanagreement, is not a binding
agreement relating to distribution and liquidation proceeds and thus is not a governing
provision unless a principal purpose of the agreement is to circumvent the one class of
stock requirement. Although a corporation is not treated as having more than one class
of stock so long as the governing provisions provide for identical distribution and
liquidation rights, any distributions (including actual, constructive, or deemed
distributions) that differ in timing or amount are to be given appropriate tax effect in
accordance with the facts and circumstances.
Section 1362(a) provides that, except as provided in § 1362(g), a small business
corporation may elect to be an S corporation.
Section 1362(d)(2)(A) provides that an election under § 1362(a) will be
terminated whenever (at any time on or after the 1st day of the 1st taxable year for
which the corporation is an S corporation) such corporation ceases to be a small
business corporation.
Section 1362(f) provides, in part, that if (1) an election under § 1362(a) by any
corporation was terminated under § 1362(d)(2); (2) the Secretary determines that the
circumstances resulting in such termination were inadvertent; (3) no later than a
reasonable period of time after discovery of the circumstances resulting in such
termination, steps were taken so that the corporation for which the termination occurred
is a small business corporation; and (4) the corporation for which the termination
occurred, and each person who was a shareholder in the corporation at any time during
the period specified pursuant to § 1362(f), agrees to make such adjustments (consistent
with the treatment of the corporation as an S corporation) as may be required by the
Secretary with respect to such period, then, notwithstanding the circumstances resulting

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in such termination, such corporation shall be treated as an S corporation during the
period specified by the Secretary.
Conclusion
Based solely on the facts submitted and representations made, we conclude that
X's S corporation election terminated on Date 3as a result of X issuing units in more
than one class of stock. We further conclude that the termination constituted an
inadvertent termination within the meaning of § 1362(f).
Therefore, we determine that pursuant to the provisions of § 1362(f), X will be
treated as continuing to be an S corporation from Date3 and thereafter, provided that
X's S corporation election was otherwise valid and has not otherwise been terminated
under §1362(d). Accordingly, from Date3 and thereafter, the shareholders of X,
including any ClassB unit holders that were shareholders during the relevant year, must
include their pro rata share of the separately stated and non-separately stated
computed items of X as provided in §1366, make any adjustments to basis as provided
in §1367, and take into account any distributions made by X as provided in §1368. If X
and its shareholders fail to treat X as described above, this ruling will be null and void.
Except as specifically set forth above, we express or imply no opinion concerning
the federal tax consequences of the facts described above under any other provision of
the Code. Specifically, we express or imply no opinion regarding X’s eligibility to be an
S corporation.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.
In accordance with a power of attorney on file with this office, we will send a copy
of this letter ruling to X's authorized representative.
Sincerely,
David R. Haglund
David R. Haglund
Chief, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosures (2)
Copy of this letter
Copy for §6110 purposes