Tax Guru – Ker$tetter Letter

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S Corp Waiting Period

Posted by taxguru on July 25, 2011

Q:

Subject: a question about converting s corp to c corp

Hello Kerry,

I read your article on converting s corp to c corp and you said when converted, the c corp cannot be changed back to s corp for at least 5 years. I’m wondering if you have official IRS documents supporting that 5-year restriction. We have a client that converted to c corp from s corp in 2009 and now wants to switch back to s corp. I told my boss we cannot do that but she affirmatively said there is a way to reverse the revocation, which I didn’t find. If you can show me the official publication about the cannot change back for 5 years restriction, I can show it to her. The link of your article is: http://www.taxguru.org/corps/scorp.htm Thanks for all your help! Have a great weekend!

Best,

 

A:

That five year waiting period has been around a long time.  Here is the relevant info from Page 19-6 of the latest edition of TheTaxBook:

Five-Year Waiting Period for Reinstatement

If an S corporation election is terminated, whether
by shareholder revocation, ceasing to qualify, or
violating the passive income restrictions, a five-
year waiting period applies during which the
corporation cannot re-elect S corporation status
without IRS consent. [IRC §1362(g)]

From the IRC:

§ 1362(g) Election after termination

If a small business corporation has made an election under subsection (a) and if such election has been terminated under subsection (d), such corporation (and any successor corporation) shall not be eligible to make an election under subsection (a) for any taxable year before its 5th taxable year which begins after the 1st taxable year for which such termination is effective, unless the Secretary consents to such election.

As I constantly advise, it is generally easier to just charter a brand new corp than to mess around with converting from C to S or vice versa.

I hope this helps.

Kerry Kerstetter

 

Follow-Up:

Dear Kerry,
 
Thanks for you immediate response and sorry for writing back to you so late.  I think my boss is determined to go around that 5 year waiting period and I’ll be writing to the Secretary for consent. I’ll let you know how that goes.
 
Best,

 

 

 

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