Late election relief in recent IRS letter rulings

Editor: Michael J. Mondelli, J.D.

Taxpayers who fail to timely make certain elections can in some cases claim automatic relief following procedures provided in IRS guidance to file the election beyond the deadline, with retroactive effect. In others, they can apply to the IRS requesting a letter ruling granting regulatory relief. Generally, such a letter ruling request must establish that the taxpayer inadvertently failed to make the election despite having acted reasonably and in good faith, that the circumstances warrant granting relief, and that granting it will not prejudice the interests of the government. While IRS letter rulings are not precedent and can be relied on only by the taxpayer who requested them, they can provide helpful guidance for tax practitioners. This item surveys selected recent IRS letter rulings illustrating the range of late elections for which relief has been granted in a variety of contexts and to several types of taxpayers.

Relief for late elections under Regs. Sec. 301.9100-1

Under Regs. Sec. 301.9100–1(c), the IRS may grant a reasonable extension of time under the rules in Regs. Secs. 301.9100–2 and 301.9100–3 to make a regulatory election or a statutory election (but for no more than six months, except in the case of a taxpayer who is abroad), under all subtitles of the Code except Subtitles E, G, H, and I.

Regs. Sec. 301.9100–2 provides automatic extensions of time for making certain elections. Regs. Sec. 301.9100–3 provides rules for requesting extensions of time for making regulatory elections that do not meet the requirements of Regs. Sec. 301.9100–2. Regs. Sec. 301.9100–3(a) provides that the IRS will grant requests for relief when the taxpayer provides evidence that establishes to the Service’s satisfaction that the taxpayer acted reasonably and in good faith and that the grant of relief will not prejudice the interests of the government.

In general, a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer: (1) requests relief before the failure to make the regulatory election is discovered by the IRS; (2) failed to make the election because of intervening events beyond the taxpayer’s control; (3) failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer’s experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for the election; (4) reasonably relied on the written advice of the IRS; or (5) reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election (Regs. Sec. 301.9100–3(b)(1)).

A taxpayer is deemed to have not acted reasonably and in good faith if the taxpayer:

(1) seeks to alter a return position for which an accuracy–related penalty has been or could be imposed under Sec. 6662 at the time the taxpayer requests relief; (2) was informed in all material respects of the required election and related tax consequences but chose not to file it; or (3) uses hindsight in requesting relief (Regs. Sec. 301.9100–3(b)(3)).

The interests of the government are prejudiced if granting relief would result in a taxpayer’s having a lower aggregate tax liability for all tax years affected by the election than if the election had been timely made (taking into account the time value of money).

The interests of the government are also ordinarily prejudiced if the tax year in which the regulatory election should have been made or any tax years that would have been affected by the election had it been timely made are closed by the period of limitation on assessment before the taxpayer’s receipt of a ruling granting relief (Regs. Sec. 301.9100–3(c)).

Recent regulatory letter rulings

Following are recently released IRS letter rulings granting relief under Regs. Secs. 301.9100–1 and 301.9100–3:

Letter Ruling 202517010. Qualifying terminable interest property (QTIP) election: A decedent’s revocable trust became irrevocable upon death, and the trust’s articles stated how property was to be transferred to a marital trust for the decedent’s spouse. The spouse, as the personal representative of the decendent’s estate, engaged an accounting firm regarding the tax treatment of the trusts and any property transfers. The firm filed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, on behalf of the decedent’s estate but failed to make a QTIP election under Sec. 2056(b)for the marital trust as intended. The decedent’s estate requested an extension of time to make the election under Regs. Secs. 301.9100–1 and 301.9100–3. The letter ruling noted the following facts:

• Articles in the irrevocable trust where the property originated outlined how the income-producing property was to be transferred to the spouse.
• Articles in the marital trust stated how the income was to be distributed as prescribed under Sec. 2056(b)(7)(B)(ii) and that the spouse had the sole right to that continued income.
• Upon discovering the error, the accounting firm began seeking ways to make a QTIP election with respect to the marital trust.

The IRS deemed that the spouse acted in good faith under Regs. Sec. 301.9100–3(b)(1)(v) in relying on the qualified tax professionals who failed to advise or make the election, and the requirements for relief under Regs. Sec. 301.9100–3 were met. Accordingly, the decedent’s estate was given 120 days to make the QTIP election with respect to the marital trust.

Letter Ruling 202523001. Qualified stock disposition in a consolidated group: Pursuant to a corporate liquidation, a parent company of a consolidated group disposed of stock in target companies to its shareholders, but the parent company failed to file a timely Sec. 336(e) election, which allows the disposition of stock to be treated as a sale of assets. All parties (parent and targets) requested an extension of time to file the election under Regs. Secs. 301.9100–1 and 301.9100–3. The letter ruling noted the following facts:

• The parent represented that the targets’ stock had been disposed of in a qualified stock disposition under Regs. Sec. 1.336-1(b)(6).
• The parties were to enter into an agreement for the disposition that followed the procedures in Regs. Sec. 1.336-2(h)(1)(i).
• The parent company had intended to file an election statement by the deadline under Regs. Secs. 1.336-2(h)(1)(i) and (iii) but failed to do so for various reasons.
• The parties represented that they were “not seeking to alter a return position for which an accuracy-related penalty … could have been imposed” under Sec. 6662.
• Information, affidavits, and representations submitted by the parties, company officials, and tax professionals involved explained the circumstances that resulted in the failure to timely enter into the agreement and file the election statement and established that the request for relief was filed before the IRS discovered their failure to do so.

The IRS concluded that the requirements for Regs. Secs. 301.9100–1 and 301.9100–3 had been met and that granting relief would not prejudice the interests of the government. Therefore, under Regs. Sec. 301.9100–3, it granted an extension of 75 days from the letter’s date for the parties to enter into the agreement and to file the Sec. 336(e) election with respect to the stock disposition.

The IRS conditioned the extension of time on the parent’s tax liabilities (if any) being no lower, in the aggregate, for all years to which the Sec. 336(e) election applied than they would have been if the agreement had been timely entered into and the election statement had been timely filed (taking into account the time value of money).

Letter Ruling 202523003. Adjustment in basis of partnership property: A limited liability company (LLC) treated as a partnership intended to make a timely election under Sec. 754. Sec. 754 provides that if a partnership files a valid election, the basis of distributed partnership property is adjusted in the manner provided in Sec. 734 and, in the case of a transfer of a partnership interest, in the manner provided in Sec. 743. The company intended but failed to file its Sec. 754 election by the deadline under Regs. Sec. 1.6031(a)-1(e) and sought an extension to file it.

Based solely on the information submitted and representations made, the IRS concluded that the requirements of Regs. Secs. 301.9100–1 and 301.9100–3 had been satisfied and granted the company a 120–day extension to make a Sec. 754 election. The Service made the ruling contingent on the LLC’s relevant filings containing adjustments to the basis of its properties to reflect any Sec. 734(b) or Sec. 743(b) adjustments that would have been made if the Sec. 754 election had been timely made.

Letter Ruling 202518015. Closing-of-the-books election: A consolidated group underwent an ownership change within the meaning of Sec. 382(a), which “limited its ability to offset post–change taxable income by pre–change losses.” The parent company of the consolidated group had intended to file an election under Regs. Sec. 1.382–6(b) to close the books at the time of the ownership change but failed to do so. The parent submitted a request under Regs. Sec. 301.9100–3 for an extension of time to file the election. The letter ruling noted the following relevant provisions and facts:

• Regs. Sec. 1.382-6(a)(1) provides that a loss corporation must ratably allocate net taxable income or net operating loss by equal portions to each day in the year unless a closing-of-the-books election is made under Regs. Sec. 1.382-6(b)(1).
• Information, affidavits, and representations submitted by the parent, company officials, and associated tax professionals explained the circumstances that resulted in the failure to file the election and confirmed the request for relief was made before the IRS found the mistake.

Based on the facts and information submitted, the IRS determined that the parent acted reasonably and in good faith and that granting relief would not prejudice the interests of the government. Thus, it granted the parent a 75–day extension under Regs. Sec. 301.9100–3 to file an election under Regs. Sec. 1.382–6(b) to close its books with respect to the ownership change. The Service made the extension contingent on the consolidated group’s tax liability not being lower, in aggregate, for the year the election applied and all subsequent years than if the election had been timely made (taking into account the time value of money).

Late elections under Rev. Proc. 2003-43

Rev. Proc. 2003–43 describes how taxpayers may request relief for late S corporation elections, qualified Subchapter S subsidiary (QSub) elections, electing small business trust (ESBT) elections, and qualified Subchapter S trust (QSST) elections. In most cases, relief can be requested within 24 months from the election’s original due date and is relatively simple.

If the entity seeking the election has not filed a tax return for the first tax year of the intended election, the entity may request relief for the late election by filing the properly completed election form with the applicable service center. The election form must be filed within 18 months of the original due date of the intended election (but in no event later than six months after the due date of the tax return (excluding extensions) of the entity (in the case of QSubs, the due date of the tax return of the parent) for the first year in which the election was intended. The election must state at the top of the document “Filed pursuant to Rev. Proc. 2003–43.” The entity must attach a statement to the election form establishing either reasonable cause for the failure to file the election timely (in the case of S corporation or QSub elections) or that the failure to file the election timely was inadvertent (in the case of ESBT or QSST elections).

If the entity seeking the election has filed a tax return for the first tax year of the intended election within six months of the due date of that tax return (excluding extensions), then the entity may request relief for the late election by filing (within 24 months of the original due date for the election) the properly completed election form and the supporting documents described in Rev. Proc. 2003–43, Section 4.03(2), with the applicable service center. The election must state at the top of the document “Filed pursuant to Rev. Proc. 2003–43.” A statement must be attached to the election form establishing either reasonable cause for the failure to file the election (in the case of S corporation or QSub elections) or that the failure to file the election timely was inadvertent (in the case of ESBT or QSST elections).

In other cases, these missed elections must be cured with a request for a letter ruling (see also Nitti, “How S Elections Go Wrong and How to Fix Them,” 56–5 The Tax Adviser 52 (May 2025)). Following are some recent such rulings.

Letter Ruling 202521009. Relief under Sec. 1362(f) contingent on ESBT shareholders: A corporation’s S election was terminated because shares were owned by trusts that met the requirements to be ESBTs but for which an ESBT election had not been made under Sec. 1361(e)(3). The corporation requested relief under Sec. 1362(f) to retain its S corporation status. The letter ruling noted the following facts:

• The corporation had been an LLC that properly filed an S corporation election under Sec. 1362(a).
• Shares of the corporation were transferred to two trusts.
• At the time of transfer, both trusts met the requirements to be ESBTs under Sec. 1361(e)(1)(A), but the trustees of both trusts inadvertently failed to file the ESBT elections under Sec. 1361(e)(3).
• The corporation represented that tax avoidance or retroactive tax planning was not a factor in the failure of the trusts to file ESBT elections and the resulting termination of its S corporation election.
• The corporation and its shareholders agreed to make any adjustments the IRS required as a condition of obtaining relief.

The IRS concluded that the termination of the corporation’s S election was inadvertent within the meaning of Sec. 1362(f) and that, accordingly, the corporation would be treated as an S corporation effective as of the date its stock was transferred to the trusts and thereafter, provided that its S corporation election was otherwise valid and not otherwise terminated under Sec. 1362(d).

The IRS made the ruling contingent upon, within 120 days of the date of the letter, the trustees of the trusts filing appropriately completed ESBT elections effective the date the corporation’s shares were transferred to the trusts. In addition, the trusts and their beneficiaries were required to file timely amended federal income tax returns for all open years consistent with treatment as ESBTs effective as of the date the corporation’s shares were transferred to the trusts.

Letter Ruling 202521010. Relief under Sec. 1362(b)(5) for sole shareholder corporation: A corporation’s sole shareholder organized and treated the corporation as an S corporation but failed to file a timely election under Sec. 1362 with Form 2553, Election by a Small Business Corporation, and sought relief under Sec. 1362(b)(5).

The IRS determined, based on the facts submitted and the representations made, that the corporation had established reasonable cause for failing to timely make an election to be an S corporation and was eligible for relief under Sec. 1362(b)(5). Thus, the IRS ruled that the corporation’s S election would be treated as timely made as of the originally intended effective date if the corporation made an S corporation election by filing a completed Form 2553 with the applicable service center within 120 days from the date of the letter.

Letter Ruling 202521021. Transfer of interest to QSub: Corporation X had an effective S corporation election at the time it acquired a 100% interest in Corporation Y. X intended for Y to be treated as a QSub as of the date of acquisition. However, due to inadvertence, Corporation X failed to timely file Form 8869, Qualified Subchapter S Subsidiary Election, on Corporation Y’s behalf and requested an extension under Regs. Sec. 301.9100–3 to file it. The letter ruling noted the following facts:

• Corporation X represented that the failure to make the election was not the result of tax avoidance or retroactive tax planning.
• Both Corporation X and Corporation Y had been reporting all tax items as if a QSub election had been in effect for Corporation Y for all relevant years.
• Corporation X further represented that both it and Corporation Y filed tax returns and reported all tax items consistent with the tax treatment of Corporation Y as a QSub for all relevant years.
• Corporations X and Y agreed to make any adjustments required by the IRS consistent with the treatment of Corporation Y as a QSub.

The IRS concluded that the requirements of Regs. Secs. 301.9100–1 and 301.9100–3 were met. It therefore granted Corporation X a 120–day extension from the ruling’s date to file a QSub election on Form 8869 on Corporation Y’s behalf with the appropriate service center, effective on the date Corporation X acquired CorporationY.

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Editor

Michael J. Mondelli, J.D., is a director in the Tax Advisory Group, with SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Mondelli at mmondelli@singerlewak.com.

Contributors are members of or associated with SingerLewak LLP.