The IRS has ruled (PLR 2012-37-001) that a corporation's status as an S corporation did not terminate even though the corporation was administratively dissolved under state law when the corporation failed to file a required report with the state.
The facts of the private letter ruling state that an entity organized as a corporation under state law (Corporation X) elected in Year 1 should be treated as an S corporation for U.S. federal income tax purposes. In Year 2, the state administratively dissolved Corporation X for failure to file a report as required by the state. Corporation X was unaware that its corporate status had been dissolved and continued to file U.S. federal income tax returns as an S corporation in Year 2 and Year 3. Corporation X eventually discovered that it had been administratively dissolved and upon such discovery reincorporated with the state. Thus, Corporation X was not a corporation under state law for all or part of Year 2 and Year 3, and sought a ruling from the IRS regarding its appropriate tax status for federal income tax purposes.
The IRS ruled, in part, that:
- Corporation X's status as an S corporation for U.S. federal income tax purposes was not terminated by its dissolution under state law, and thus Corporation X was not required to make a new S corporation election;
- Corporation X's administrative dissolution did not result in a distribution or transfer of property by Corporation X to its shareholders upon dissolution, and did not result in a contribution of property by its shareholders to Corporation X upon reincorporation; and
- Corporation X may continue to use its original employer identification number (EIN) and is not required to obtain a new EIN for the newly incorporated entity.
The IRS based its ruling on case law and reasoned that an organization's status as a corporation for federal income tax purposes is a matter of federal law, not state law. An organization without a valid corporate charter can continue to be an association taxed as a corporation for federal purposes as long as it continues to do business in a corporate manner. Thus, the IRS disregarded Corporation X's dissolution and subsequent reincorporation, and allowed it to continue as an S corporation without interruption.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
