2015 Napa Williamsburg Special Topics Electronic

NOTE: Without affirmatively saying it, Notice 2008-1 effectively overturns the 2005position of the IRS Chief Counsel and guidance which appeared in an article on IRS’swebsite back in 2006. That position had concluded that an S-Corporation’s soleshareholder-employee could not buy health insurance in his own name and have theabove-the-line deduction for the premium expense. However, if certain requirementsare met, such a deduction is now possible and may be gained for a prior year by filingan amended return.IRS eased position. The Service now states that a plan providing medical care coveragefor a 2% shareholder-employee is deemed to be established by the S-Corporation if:1. The corporation makes the premium payments for the health insurance policy covering the 2% shareholder-employee (and his spouse or dependents, if applicable) in the current tax year; or2. The 2% shareholder makes the premium payments and furnishes proof of payment to the corporation and the corporation then reimburses the shareholder. NOTE: If the health insurance premiums are not paid or reimbursed by the S-Corporation and included in the 2% shareholder-employee’s gross income, then a plan providing medical care coverage for the 2% shareholder-employee is not deemed to be established by the S-Corporation and the shareholder is not allowed the §162(1) deduction.3. Notice 2008-1 states that in order for a 2% shareholder-employee to deduct the amount of the health insurance premiums, the S-Corporation must report the health insurance premiums paid or reimbursed as wages on Form W-2 in that same year. In addition, the shareholder must report the premium payments or reimbursements as gross income on Form 1040.4. Notice 2008-1 provides four examples. The examples assume that each shareholder is a 2% shareholder-employee in an S-Corporation, whose earned income from the S-Corporation exceeds the amount of the premiums for the health insurance policies covering the shareholder, his spouse and dependents. No shareholder is eligible to participate in any subsidized health plan maintained by an employer of the shareholder or his spouse. All examples involved tax year 2008.EXAMPLE #1: A shareholder obtains a health insurance policy in the shareholder’sown name and pays the premium on the policy. The S-Corporation makes no paymentsor reimbursement with respect to the premiums. 28

Result: A plan providing medical care for the shareholder is not established by theS-Corporation and therefore the shareholder may not deduct the premiums under§162(1).EXAMPLE #2: The S-Corporation obtains a health insurance plan in the corporatename. The plan provides coverage for the shareholder, spouse and dependents. TheS-Corporation pays all premiums and reports them as wages on shareholder’s Form W-2 for 2008 and shareholder reports them as gross income on Form 1040 for 2008.Result: A plan providing medical care for the shareholder has been established by theS corporation and shareholder may take the §162(1) deduction for 2008.EXAMPLE #3: The shareholder obtains a health insurance policy in the shareholder’sown name and the S-Corporation pays all premiums and reports them as wages on theshareholder’s Form W-2 for 2008.Shareholder reports the premiums as gross income on the Form 1040 for 2008.Result: A plan providing medical care for the shareholder has been established by theS-Corporation and shareholder may take the §162(1) deduction for 2008.EXAMPLE #4: The shareholder obtains a health insurance policy in the shareholder’sown name and pays the premiums and furnishes proof of payment to the S-Corporation,which reimburses the shareholder for the payments. The S-Corporation reports theamount of the premium reimbursements as wages on shareholder’s Form W-2 for 2008and shareholder reports the premiums as gross income on Form 1040 for 2008.Result: A plan providing medical care for the shareholder has been established by theS-Corporation and shareholder may take the §162(1) deduction for 2008.Amended returns for prior tax years. A taxpayer who did not claim a deduction forhealth insurance coverage described in Notice 2008-1 may file a timely amended taxreturn to claim the §162(1) deduction if he satisfies the notice’s requirements. Thestatement “Filed Pursuant to Notice 2008-1” should be written on the top of theamended return.Effect on single class of stock requirement. Notice 2008-1 states that IRS does notconsider payments of health insurance premiums by an S-Corporation on behalf of 2%shareholder-employees to be distributions for purposes of the single class of stockrequirement of §1361(b)(1)(D). 29

II. Corporate Life Cycle Includes Termination: Liquidation A. General Review 1. One of the course objectives is to give a general background of the income tax consequences of a liquidation on both the shareholders and the corporate entity. 2. As part of the corporate life cycle, taxpayers may decide to discontinue the operations of a profitable corporation by liquidating it. As a result of this decision, the shareholders may receive liquidating distributions of the corporation's assets. 3. Preceding the formal liquidation, the corporation may sell part or all of the corporation's assets. The sale may take place in order to: a. Dispose of assets which the shareholder(s) may not want to receive in a liquidating distribution, or b. To obtain cash which can be used to pay off the corporation's liabilities and distribute the excess cash to the shareholder(s). 4. The small business client must consider all the tax issues of corporate liquidation. 5. The bases of the corporate assets are stepped-up or down to their fair market value (FMV) when distributed in a liquidating distribution. This permits a smaller gain to be recognized by the shareholder when appreciated properties are subsequently sold or exchanged. 6. The tax effect of this basis adjustment is that the liquidating corporation must recognize gain when making the distribution. 7. Sometimes a corporation is terminated because a buyer cannot be found or there are no family members who want to continue the daily operation. 8. Sometimes a corporation is terminated due to the fact that it is debt ridden and cannot continue to operate. 30

B. Income Tax Effects of Corporate Liquidations: Gain or Loss to Shareholders and Entity 1. The tax professional will need to assist their client in solving important issues when the entity liquidates such as: • What is the tax effect to the liquidating entity? • What is the amount and character of the shareholders' recognized gain or loss? • What is the adjusted basis of the property that is received by the shareholder? • When does the holding period commence for the property that is received by the shareholders? 2. When a corporation is liquidated the liquidating distribution is treated as an amount received in exchange for the shareholder's stock. 3. The shareholder recognizes a capital gain or loss on the excess of the money received plus the FMV of other property received from the entity over the adjusted basis of their stock. 4. §331(a) provides that when a corporation ceases to exist and it distributes assets to a shareholder the amounts received by a shareholder in a distribution in complete liquidation of a corporation shall be treated as full payment in exchange for the stock. 5. The corporation can liquidate the assets by either: a. Selling the assets and distributing the proceeds to the shareholder or b. Distributing the assets directly to the shareholders under a “deemed sale”.C. Basis of Property Received by the Shareholder in Liquidation of the Corporation 1. The bases of the properties that are received are stepped-up or stepped-down to the property's FMV on the liquidation date. The holding period of the assets commences on the day after the liquidation date. 2. §334(a) provides a general rule that if property is received in a distribution in complete liquidation, and if gain or loss is recognized on receipt of such property, then the basis of the property in the hands of the shareholder shall be the fair market value of such property at the time of the distribution. 31

D. Gain or Loss Recognized by the S-Corporation on Property Distributed in Complete Liquidation1. The tax professional will also assist the corporate client in solving the income tax issues pertaining to the amount and character of the corporation's recognized gain or loss.2. §336(a) provides a general rule that gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such property were sold to the shareholder at its fair market value.3. §336(b) addresses the issue of any liabilities that may be attached to the property distributed. The law provides that if any property distributed in liquidation is subject to a liability or the shareholder assumes a liability of the liquidating corporation in connection with the distribution then the fair market value of such property cannot be less than the amount of such liability assumed or acquired.4. §336(b) was enacted because the corporation has an economic gain or benefit equal to the amount of the liability assumed or acquired by the shareholder (and not just the lower FMV of the property distributed) as part of the liquidation.5. The shareholders of the liquidated corporation will have a basis in the distributed property equal to the amount of the liability assumed or acquired.EXAMPLE: Don Corporation owns assets costing $300,000 which have beendepreciated and the adjusted basis is $240,000. The property is secured by a $270,000note. A plan of liquidation is adopted, and the property and the note are distributed toDon, the sole shareholder. The property's FMV is $220,000. Don Corporation mustrecognize a $30,000 gain ($270,000 - $240,000) on distributing the property since itsFMV cannot be less than the $270,000 note on the property. Therefore the property'sbasis is also $270,000 to Don. Corporate Level: $300,00Cost $(60,000)Less: Accumulated Depreciation $240,000Adjusted Basis $(270,000)Less: Debt on Asset $ 30,000Debt Relief32

E. Definition of a Complete Liquidation: Not Defined in the Code 1. The term complete liquidation is not defined in the Code. However, Reg. §1.332- 2(c) states that distributions made by a liquidating corporation must either: a. Completely cancel or redeem all of its stock in accordance with a plan of liquidation, or b. Be one of a series of distributions that completely cancels or redeems all of its stock in accordance with a plan of liquidation. 2. When there is more than one distribution, the corporation must be in a liquidation status at the time that the first liquidating distribution is made under the plan. This liquidation status must continue until the liquidation is completed. Tax Professional Sidebar Notation: If operating a C-Corporation then a distribution that is made before a plan of liquidation is adopted will generally be taxed under the dividend distribution or stock redemption rules if operating a C-Corporation. 3. A liquidation status exists when the corporation ceases to be a going concern and its activities are merely for the purpose of: a. Winding up its affairs, b. Paying its debts, and c. Distributing any remaining properties to its shareholders. 4. A liquidation is completed when the liquidating corporation has divested itself of all properties. 5. The retention of a nominal amount of assets (e.g., to retain the corporation's name) does not prevent a liquidation from occurring for tax purposes. 6. Tax Professional Note: The liquidation of a corporation does not mean that a corporation has under gone dissolution. Dissolution is a legal term that implies that the corporation has surrendered the charter that it originally received from the state. 33

A corporation may complete its liquidation prior to surrendering its charter to the state and undergoing dissolution. Dissolution may never occur if the corporation retains its charter in order to protect the corporate name from being acquired by another party. EXAMPLE: Don Corporation adopts a plan of liquidation in December 2014. All but a nominal amount of Don's assets are distributed to its shareholders in January 2015. The nominal assets are retained to preserve the corporation's existence under state law and to prevent others from acquiring the corporation's name. The retention of the nominal amount of assets does not prevent Don from having been liquidated for tax purposes in January 2015.F. Tax Effects of the General Liquidation Rules 1. The coverage of the general liquidation rules is divided into the following issues: • Amount and timing of gain or loss recognition, • Character of the recognized gain or loss, and • Basis of property received in the liquidation.G. Amount of Recognized Gain or Loss 1. §331(a) requires that amounts received by a shareholder as a distribution in complete liquidation of a corporation be treated as full payment in exchange for the stock. 2. The amount of the shareholder's recognized gain or loss equals the difference between the amount realized and the basis for the stock. 3. If a shareholder assumes or acquires liabilities of the liquidating corporation, then the amount of these liabilities reduces the amount realized by the shareholder. EXAMPLE: Don Corporation is liquidated with Don receiving $10,000 and other property having a $12,000 FMV. Don's basis in his stock is $16,000. Don's amount realized is $22,000 ($12,000 + $10,000). He must recognize a $6,000 ($22,000 - $16,000) gain on the liquidation. EXAMPLE: Assume the same facts as above except that Don also assumes a $2,000 debt attached to the other property. Don's amount realized is reduced by the $2,000 liability assumed and is $20,000 ($22,000 - $2,000). The recognized gain on the liquidation is now only $4,000 ($20,000 - $16,000). 34

H. Stock Acquired at Various Times 1. If the shareholder's stock basis has been acquired at different times, then the shareholder must compute the gain or loss separately for each share or block of stock that is owned.I. Basis of Property Received in the Liquidation 1. §334(a) provides that the basis of any property received under the general liquidation rules is its FMV on the distribution date. The holding period for the asset starts on the day after the distribution date.J. Subsequent Assessments Against the Shareholders 1. The shareholders may be required at a date subsequent to the liquidation to pay a contingent liability of the corporation or a liability that is not anticipated at the time of the liquidating distribution (e.g., an income tax deficiency determined after the liquidation is completed or a judgment that is contingent at the time the final liquidation distribution is made). 2. The additional payment does not affect the reporting of the original liquidating transaction. 3. The tax treatment for the additional payment depends on the nature of the gain or loss that was originally reported by the shareholder and not on the type of loss or deduction that would have been reported by the liquidating corporation if it had instead paid the liability. 4. If the liquidation results in a capital gain or loss being recognized, then any additional payment is deductible in the year paid as a capital loss. Tax Professional Note: An amended tax return is not filed for the year in which the gain or loss from the liquidation was originally reported. EXAMPLE: X Corporation is liquidated in 2014, with Don reporting a $30,000 long-term capital gain on the exchange of stock. In 2015 Don is required to pay $5,000 of unpaid liabilities incurred by X Corporation. An additional amount must be paid by all shareholders, because the liabilities exceed the amount of funds that X Corporation placed into an escrow account. The $5,000 additional payment is reported in 2015 by Don as a long-term capital loss. 35

K. Effects of Liquidation on the Liquidating Corporation1. At the time of liquidation the corporation must address two issues:a. The recognition of gain or loss by the liquidating corporation when it distributes property,b. The deductibility of the expense of liquidating.2. In the recognition of gain or loss when property is distributed in redemption of stock, §336(a) provides that gain or loss must be recognized by the liquidating corporation when property is distributed in a complete liquidation.3. The amount and character of the gain or loss are determined as if the property is sold at its FMV.EXAMPLE #1: Under West Corporation's plan of liquidation, a corporate asset isdistributed to Don one of the shareholders. The asset has a $40,000 adjusted basis toWest and a $120,000 FMV on the distribution date. West must recognize an $80,000§1231 gain ($120,000 - $40,000) when it makes the liquidating distribution.Fair Market Value $120,000Less: Adjusted Basis of Asset $(40,000)§1231 Corporate Level gain $ 80,000Don must recognize a gain to the extent that the asset's FMV exceeds his basis for theWest stock. Don's basis for the asset is its $120,000 FMV. The distribution of theasset to Don produces the same tax burden as if West Corporation had sold the assetand distributed the cash proceeds.KEY POINT: The general rule is that the liquidating corporation recognizes gain orloss on a distribution in a complete liquidation. The gain or loss is computed as if theliquidating corporation had sold all of its assets to the distribute shareholder at theproperty's FMV.Note: The liquidating corporation can recognize a loss when the liquidated propertythat has decreased in value is distributed to its shareholders.36

EXAMPLE #2: Assume the same facts as above except that the FMV of the asset is$10,000. West Corporation is permitted to recognize a $30,000 §1231 loss ($10,000 -$40,000 adjusted basis) when the asset is distributed to Don.Fair Market Value $ 10,000Less: Adjusted Basis of Asset $(40,000)§1231 Corporate Level (loss) $(30,000)Note: Don's basis for the asset is $10,000 (FMV).L. General vs. Specific Expenses of the Liquidation1. The corporation is permitted to deduct the general liquidation expenses incurred in connection with the liquidation transaction.2. These costs include attorney's and accountant’s fees, costs incurred in drafting the plan of liquidation and obtaining shareholder approval, etc.3. The specific liquidation expenses associated with selling the corporation's properties are treated as an offset against the sales proceeds. When a corporation sells an asset pursuant to its liquidation, the selling expenses reduce the amount of gain or increase the amount of loss reported by the corporation. EXAMPLE: X Corporation adopts a plan of liquidation on July 15, 2015, and shortly thereafter sells an asset on which it realizes a $60,000 gain before the deduction of a $6,000 sales commission. X pays its legal counsel $1,500 to draft the plan of liquidation. All of the remaining properties are distributed to its shareholders in December 2013. The $1,500 paid to legal counsel is deductible as a general liquidation expense in the 2015 income tax return.The specific sales commission reduces the $60,000 gain realized on the asset sale, sothat the corporation recognized gain is reduced to $54,000 ($60,000 - $6,000).4. Any amounts of capitalized expenditures that are unamortized at the time of liquidation should be deducted if they have no further value to the corporation (e.g., unamortized organizational costs).5. Capitalized expenditures that have value must be allocated to the shareholders receiving the benefit of such an outlay (e.g., prepaid insurance, prepaid rent, tax refunds, etc.).37

6. Expenses related to the issuing of the corporation's stock are not deductible by the corporation, even at the time of liquidation. They are treated as a reduction in paid- in capital on the corporate books.M. Corporate Filing Requirements 1. §6043(a) requires that every corporation shall make a return regarding its distributions in liquidation. 2. Within 30 days after the adoption by the corporation of a resolution or plan for the dissolution of the corporation, or the liquidation of the capital stock, the corporation must make a return setting forth the terms of such resolution or plan and such other information as the Secretary shall prescribe by forms or regulations (IRS Form 966). 3. The statement must include: a. Name and address of each shareholder, b. Number and class of shares owned by each shareholder, and c. The amount paid to each shareholder. 4. If the distribution is in property other than money, then the fair market value of the property must be reported as of the date the distribution is made to each shareholder. 38

III. EXHIBITS 39

Summary of Shareholder’s Basis Increases DecreasesOriginal cost of shareholder’s stock Distributions that are a return of basisShareholder loans to S corporation Repayment of shareholder loans by S corporationSeparately states income/gain Separately stated losses/deductionsNon-separately stated income/gain Nondeductible expenses not properly charge to capital accountExcess depletion deductions over basis of property Depletion deduction or oil and gas wells, to extentbeing depleted of shareholder’s basis in depletable property.Additional capital contributions or stock purchases Distributions not in excess of basis. 40

Statement of Revocation of S-Election Date: _________________________Internal Revenue Service Center__________________________________________________________________________ ________________RE:________________________________ ___________________________________________________ ___________________________________________________Please be advised that the above corporation hereby revokes the Subchapter S-election it made underSection §1362(a) of the Internal Revenue Code. This revocation is intended to be effective on____________. The corporation has ____________ shares of stock issued and outstanding at this time.A statement signed by more than 50% of the corporation’s shareholders consenting to the revocation isattached.Sincerely,_________________________________Title of Authorized Signor of Tax Return 41

Statement of Consent of Revocation of the S-ElectionThe undersigned, as shareholders of The ____________ Corporation, EIN ____________ on____________, the date of revocation by that corporation of its election under §1362(a) to be anS-Corporation, hereby consent to that revocation. The shareholders are calendar year taxpayers. Theyacquired their shares in the corporation on ____________.Under penalties of perjury, we declare that the statements made herein are to the best of our knowledgeand belief, true, correct and complete.Name, Address and Social Security No. of ShareholderNumber of Shares Held at Time Revocation is MadeDate of Signature___________________________Signature________________________________________________________X 42

Statement of Consent to Rescind the Revocation of the S-ElectionThe undersigned, as shareholders of The ____________ Corporation, EIN ____________ on____________, the date that is elected to rescind the revocation of its S-Corporation election under§1362(a) hereby consent to that recision. The shareholders are calendar year taxpayers. They acquiredtheir shares in the corporation onUnder penalties of perjury, we declare that the statements made herein are to the best of our knowledgeand belief, true, correct and complete.Name, Address and Social Security No. of ShareholderNumber of Shares Held at Time Revocation is MadeDate of Signature___________________________Signature________________________________________________________X 43

Election Not To Apply Pro Rata AllocationCorporation _________________________________________EIN _________________________________________Tax Year _________________________________________The corporation elects (with the consent of all shareholders during the short S year and all shareholderson the first day of the C year under §1362(e) (3) not to apply the pro rata allocation method of1362(e) (2) for determining the amounts of income, expense, and credit to be allocated to the S shortperiod ended ____________ and to the C short period ended ____________. The corporation elects toclose its books as of ____________ and to take into account under normal tax accounting rules thespecific transactions that apply to each short period.Cause of S Termination: _________________________________________Date of Termination: _________________________________________Date: _________________________________________By: _________________________________________ Authorized Officer 44

Consent of ShareholdersThe following shareholders, constituting each of the shareholders of the corporation during the S shortperiod and each person who was a shareholder of the corporation on the first day of the C short yearconsent to the above corporate election.Date Shareholder Signature Social Security No. 45

PER-SHARE, PER-DAY ALLOCATION METHODThe pro rata method assigns an equal amount of each of the S items to each day of the year. If ashareholder’s stock holding changes during the year, then the per-day method assigns the shareholder apro rata share of each item for each day the stock is owned:S-Corporation item X Percentage of Shares Owned X Percentage of Year Owned = Amount of item tobe reported. 46

Subchapter S-Corporation Checklist: Yes No1. Is the entity incorporated?2. If incorporated did the entity file a timely Form 2553?3. If not incorporated is the entity an LLC that filed Form 8832?4. Are all shareholders eligible to own Subchapter S stock?5. Should bonuses be paid to employee shareholders before year-end?6. Before making a §179 election did you verify that shareholders will be able to use the full pass through amount?7. If there is a current year loss do shareholders have sufficient basis to utilize loss?8. Do shareholders have sufficient stock basis to avoid distributions treated as capital gains?9. Is the entity using property of the owners which should be treated as a lease agreement (Rental of building or equipment)?10. Have shareholders been reimbursed for out-of-pocket expenses paid on behalf of the entity? Is there an accountable plan in force?11. Are there employee benefit plans in force?12. Has any business property been distributed to shareholders?13. Do shareholders have a buy/sell agreement?14. Is there a need to revoke the S-election?15. Have the basis of the assets transferred in the §351 transaction been properly accounted for by the entity and shareholders?47

Tax Advocate’s Report Highlights Subchapter S-Corporation Issues IR 2008-4, 01/08/2008Over three million S-Corporations filed returns in 2006. Subchapter S-Corporations are the mostcommon corporate entity. The National Taxpayer Advocate’s 2007 Annual Report notes that the IRScontinues to struggle to develop an effective and comprehensive strategy to address noncompliance byS-Corporations. The Report focuses on some of the challenges in this area, including: 1. Insufficient data to assess compliance risks, 2. Undue taxpayer burden because of the S corporation election process, and 3. Schedule K-1 matching errors. Specifically, the Report examined the avoidance of employment taxes because the entity reports shareholder wages as distributions. The Report states that the continual growth in S corporation filings (which account for 65% of all corporate returns) may be due in part to: 1. Low individual tax rates, 2. Limited liability, and 3. The perceived opportunity for sole proprietors to avoid self-employment tax. Compliance Data Difficulties. 1. The Service stratifies S-Corporation filings into three separate asset ranges (as compared with the 13 ranges for C-Corporations). This can make identifying returns with higher compliance risk more difficult, especially when 99% of all S-Corporations returns report assets of $10 million or less. 2. In fiscal year 2006, an S-Corporation faced only a 4 in 1000 change of being audited, compared to 8 in 1000 for C-Corporations. 3. The Report noted that the IRS increasingly identifies S-Corporation returns for examination to address abusive tax schemes and avoidance transactions, but identifying compliance risk associated with multi-entity return groups is challenging. 48

NOTE: IRS is also developing a high income taxpayer strategy to test the hypothesis that the highest income strata of Forms 1040, Individual Income Tax Return, are using a variety of tax products and entity structures to defer tax liability into future years, convert ordinary income into lower capital gain tax income or offset income with sham losses.4. At the conclusion of an examination when the IRS proposes changes to S-Corporation returns it reports each shareholder’s share of the change as an adjustment to the individual shareholder’s tax return.5. In addition to certain deficiencies with the audit process, IRS is unable to measure its effectiveness in S-Corporation examinations because it does not track the ultimate tax at the Form 1040 level. IRS records audit results at the S-Corporation level but never associates them with the tax assessment.Subchapter S-elections and K-1 filings.1. Taxpayers elect S-Corporation status by filing Form 2553, Election by a Small Business Corporation, on or before the 15th day of the third month of the tax year for which the election is to be in effect.2. If the election is not timely filed or is incomplete, then the S-Corporation return is converted to a C-Corporation return when filed. In past years, roughly 14% to 16% of total new S-Corporation filings were unpostable (i.e., the S corporation election was not approved).3. Approximately 20% of S-Corporation returns are unpostable for multiple years because of missing information or IRS processing errors.4. S-Corporations file a Schedule K-1 each year to report profit and loss to their shareholders. IRS then matches income and loss information from Schedules K-1 to individual tax returns and generates notices when differences arise.5. Although returns are screened to eliminate unnecessary notices, the error rate is still high. IRS technicians who examine discrepancies have limited accounting and tax training, while S-Corporation returns contain many complex issues that may go undetected where employees only address flow-through income.6. Further, since the Schedule K-1 matching program is part of the Automated Underreporter (AUR) program unit which limits human involvement, many taxpayers are unable to reach a trained IRS employee to answer questions concerning mismatched K-1s because the AUR program’s level of service is poor and the program has no dedicated line for practitioners. 49

7. The Report concluded that IRS should focus on reducing taxpayer burden associated with the S-Corporation election process and the K-1 matching program. Taxpayers and return preparers have identified the S-Corporation election process as one of the most difficult for eligible small business corporations.8. While efforts have been made to simplify the S-election process and reduce processing costs, the Report concluded that the best approach to reducing taxpayer burden is to permit the election to be considered timely filed with the first S-Corporation return. REMINDER: This change was implemented for tax years ending on or after December 31, 2007. NOTE: Taxpayers and practitioners also need access to knowledgeable IRS employees to deal with the often complex questions regarding S-Corporation and K-1 matching issues. Compensation vs. Corporate Distribution1. The earnings of an S-Corporation are taxed as ordinary income to its shareholders. Unlike partnership or sole proprietor earnings, S-Corporation earnings are not subject to self- employment tax.2. This treatment gives rise to a tax planning strategy that recharacterizes shareholder compensation as distributions of profit to avoid payroll taxes. The S-Corporation owner pays employment taxes on only the portion of profits that the owners arbitrarily decide is “salary.”3. The S-Corporation officer or shareholder, who takes no salary or a nominal salary, receives the remaining compensation as a tax-free distribution from self-employment. The corporation saves payroll taxes and the shareholder pays only income taxes on his share of the corporate profits, avoiding paying Social Security and Medicare taxes. NOTE: In tax year 2005, almost one million S-Corporations with one shareholder paid no officers’ compensation. The Report calculates that if all profitable S-Corporations that reported no officers’ compensation had been Schedule C businesses, they would have paid an estimated $4.9 billion in self-employment tax.4. The Report notes that the wage-to-distribution conversion strategy may reduce the shareholder’s future Social Security benefits which is an important part of most individuals’ retirement income. A taxpayer’s Social Security benefit depends on the amount of pre- retirement wages received and Social Security taxes paid. 50

5. Although the IRS has repeatedly litigated this issue and has won, taxpayers continue to use it as a tax planning strategy. The Service acknowledges this issue as a special compliance problem, featuring it in corporate classification guidelines for Form 1120S and including a reference to it in its notice of acceptance of S-Corporation status.6. The IRS continues to audit returns based on this issue and reclassify distributions as wages subject to employment taxes. But establishing a fair and reasonable wage is difficult and time consuming. Examiners must consider: a. The financial condition of the corporation, b. The time worked by the shareholder, c. The company’s compensation policy for other workers, d. The salary structure in companies in similar industries, and e. The return on investment.NOTE: The easiest cases for the Service to litigate and win are those where a sole S corporationowner claims no salary or negligible salary subject to employment taxes despite the fact that hemay serve in key roles in the business, providing management, sales, or service functions,controlling the day to day activities of the company and making decision affecting its future. Themore difficult cases are those asserting that the amount of salary is not sufficient, i.e., reasonable.CONCLUSION: The Report concludes that actions are needed to reverse the trends of electingS corporation status to avoid Social Security taxes. The employment tax strategy has aneconomic impact on the tax gap and erodes the Social Security and Medicare tax base. Whileacknowledging the challenges faced by IRS in dealing with this compliance issue (whilereducing taxpayers’ burden), the Report concludes that the IRS must find the right balance ofresearch, training, outreach and compliance activities to improve the quality of S corporationaudits. 51

Case Study Issues1. Angel Pagan and his brother Diabalo are 50/50 owners of a business that began January 1, 2013.2. The company’s gross receipts from sales was $1,000,000 and they received qualified dividends from investments of $10,000.3. Per the employment contracts Angel received $200,000 for his service to the company and Diabalo received $175,000. In addition they each received a distribution of $20,000 from the profits for the year.4. Other non-owner employees received $200,000 of compensation in the form of W-2 salary. $25,000 of payroll taxes were paid by the company for these employees and $25,000 was paid in payroll taxes for Angel and Diabalo.5. The company paid $10,000 of interest expense on loans and there was a $10,000 charitable contribution. In addition there is a pension plan which contributes 25% of compensation for all employees.6. Medical benefits include health insurance premiums of $12,500 each for Angel and Diabalo and $25,000 for the employees.7. The company had outstanding loans receivable from the owners of $4,500 and the company paid $6,000 in escrow into another asset account.8. There is a loan due to the owners of $10,000 on December 31, 2014, and the equity on January 1, 2014 was $35,000.9. The company invested $100,000 in equipment and elected a §179 expense deduction. 52

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2553Form Election by a Small Business Corporation OMB No. 1545-0123 (Under section 1362 of the Internal Revenue Code)(Rev. December 2013) ▶ See Parts II and III on page 3.Department of the Treasury ▶ You can fax this form to the IRS (see separate instructions).Internal Revenue Service ▶ Information about Form 2553 and its separate instructions is at www.irs.gov/form2553.Note. This election to be an S corporation can be accepted only if all the tests are met under Who May Elect in the instructions, all shareholders have signed the consent statement, an officer has signed below, and the exact name and address of the corporation (entity) and other required form information have been provided.Part I Election Information A Employer identification number Name (see instructions)Type Number, street, and room or suite no. (If a P.O. box, see instructions.) B Date incorporatedor Print City or town, state, and ZIP code C State of incorporationD Check the applicable box(es) if the corporation (entity), after applying for the EIN shown in A above, changed its name or addressE Election is to be effective for tax year beginning (month, day, year) (see instructions) . . . . . . ▶ Caution. A corporation (entity) making the election for its first tax year in existence will usually enter the beginning date of a short tax year that begins on a date other than January 1.F Selected tax year: (1) Calendar year (2) Fiscal year ending (month and day) ▶ (3) 52-53-week year ending with reference to the month of December (4) 52-53-week year ending with reference to the month of ▶ If box (2) or (4) is checked, complete Part II.G If more than 100 shareholders are listed for item J (see page 2), check this box if treating members of a family as oneshareholder results in no more than 100 shareholders (see test 2 under Who May Elect in the instructions) ▶H Name and title of officer or legal representative who the IRS may call for more information I Telephone number of officer or legal representativeIf this S corporation election is being filed late, I declare that I had reasonable cause for not filing Form 2553 timely, and if thislate election is being made by an entity eligible to elect to be treated as a corporation, I declare that I also had reasonable causefor not filing an entity classification election timely and that the representations listed in Part IV are true. See below for myexplanation of the reasons the election or elections were not made on time and a description of my diligent actions to correct themistake upon its discovery (see instructions).Sign Under penalties of perjury, I declare that I have examined this election, including accompanying documents, and, to the best of myHere knowledge and belief, the election contains all the relevant facts relating to the election, and such facts are true, correct, and complete. Signature of officer▲ Title DateFor Paperwork Reduction Act Notice, see separate instructions. 63 Cat. No. 18629R Form 2553 (Rev. 12-2013)

Form 2553 (Rev. 12-2013) Page 2 Part I Election Information (continued) Note. If you need more rows, use additional copies of page 2. K L Shareholder's Consent Statement Stock owned or Under penalties of perjury, I declare that I percentage of ownership consent to the election of the above-named (see instructions) corporation (entity) to be an S corporation under J section 1362(a) and that I have examined this Number of Date(s) M N Name and address of each consent statement, including accompanying shares or acquired Social security Shareholder’sshareholder or former shareholder documents, and, to the best of my knowledge and percentage tax year endsrequired to consent to the election. belief, the election contains all the relevant facts of ownership number or relating to the election, and such facts are true, employer (month and (see instructions) correct, and complete. I understand my consent is identification day) binding and may not be withdrawn after the number (see corporation (entity) has made a valid election. If instructions) seeking relief for a late filed election, I also declare under penalties of perjury that I have reported my income on all affected returns consistent with the S corporation election for the year for which the election should have been filed (see beginning date entered on line E) and for all subsequent years. Signature Date Form 2553 (Rev. 12-2013) 64

Form 2553 (Rev. 12-2013) Page 3 Part II Selection of Fiscal Tax Year (see instructions)Note. All corporations using this part must complete item O and item P, Q, or R.O Check the applicable box to indicate whether the corporation is:1. A new corporation adopting the tax year entered in item F, Part I.2. An existing corporation retaining the tax year entered in item F, Part I. 3. An existing corporation changing to the tax year entered in item F, Part I.P Complete item P if the corporation is using the automatic approval provisions of Rev. Proc. 2006-46, 2006-45 I.R.B. 859, to request (1) a natural business year (as defined in section 5.07 of Rev. Proc. 2006-46) or (2) a year that satisfies the ownership tax year test (as defined in section 5.08 of Rev. Proc. 2006-46). Check the applicable box below to indicate the representation statement the corporation is making.1. Natural Business Year ▶ I represent that the corporation is adopting, retaining, or changing to a tax year that qualifies as its naturalbusiness year (as defined in section 5.07 of Rev. Proc. 2006-46) and has attached a statement showing separately for each month the grossreceipts for the most recent 47 months (see instructions). I also represent that the corporation is not precluded by section 4.02 of Rev. Proc.2006-46 from obtaining automatic approval of such adoption, retention, or change in tax year.2. Ownership Tax Year ▶ I represent that shareholders (as described in section 5.08 of Rev. Proc. 2006-46) holding more than half ofthe shares of the stock (as of the first day of the tax year to which the request relates) of the corporation have the same tax year or areconcurrently changing to the tax year that the corporation adopts, retains, or changes to per item F, Part I, and that such tax year satisfiesthe requirement of section 4.01(3) of Rev. Proc. 2006-46. I also represent that the corporation is not precluded by section 4.02 of Rev. Proc.2006-46 from obtaining automatic approval of such adoption, retention, or change in tax year.Note. If you do not use item P and the corporation wants a fiscal tax year, complete either item Q or R below. Item Q is used to request a fiscaltax year based on a business purpose and to make a back-up section 444 election. Item R is used to make a regular section 444 election.Q Business Purpose—To request a fiscal tax year based on a business purpose, check box Q1. See instructions for details including payment of a user fee. You may also check box Q2 and/or box Q3.1. Check here ▶ if the fiscal year entered in item F, Part I, is requested under the prior approval provisions of Rev. Proc. 2002-39,2002-22 I.R.B. 1046. Attach to Form 2553 a statement describing the relevant facts and circumstances and, if applicable, the gross receiptsfrom sales and services necessary to establish a business purpose. See the instructions for details regarding the gross receipts from salesand services. If the IRS proposes to disapprove the requested fiscal year, do you want a conference with the IRS National Office?Yes No2. Check here ▶ to show that the corporation intends to make a back-up section 444 election in the event the corporation’s businesspurpose request is not approved by the IRS. (See instructions for more information.)3. Check here ▶ to show that the corporation agrees to adopt or change to a tax year ending December 31 if necessary for the IRSto accept this election for S corporation status in the event (1) the corporation’s business purpose request is not approved and thecorporation makes a back-up section 444 election, but is ultimately not qualified to make a section 444 election, or (2) the corporation’sbusiness purpose request is not approved and the corporation did not make a back-up section 444 election.R Section 444 Election—To make a section 444 election, check box R1. You may also check box R2.1. Check here ▶ to show that the corporation will make, if qualified, a section 444 election to have the fiscal tax year shown in item F,Part I. To make the election, you must complete Form 8716, Election To Have a Tax Year Other Than a Required Tax Year, and eitherattach it to Form 2553 or file it separately.2. Check here ▶ to show that the corporation agrees to adopt or change to a tax year ending December 31 if necessary for the IRSto accept this election for S corporation status in the event the corporation is ultimately not qualified to make a section 444 election.Part III Qualified Subchapter S Trust (QSST) Election Under Section 1361(d)(2)*Income beneficiary’s name and address Social security numberTrust’s name and address Employer identification numberDate on which stock of the corporation was transferred to the trust (month, day, year) . . . . . . . . . . . ▶In order for the trust named above to be a QSST and thus a qualifying shareholder of the S corporation for which this Form 2553 is filed, I hereby makethe election under section 1361(d)(2). Under penalties of perjury, I certify that the trust meets the definitional requirements of section 1361(d)(3) and thatall other information provided in Part III is true, correct, and complete.Signature of income beneficiary or signature and title of legal representative or other qualified person making the election Date*Use Part III to make the QSST election only if stock of the corporation has been transferred to the trust on or before the date on which the corporationmakes its election to be an S corporation. The QSST election must be made and filed separately if stock of the corporation is transferred to the trustafter the date on which the corporation makes the S election. Form 2553 (Rev. 12-2013) 65

Form 2553 (Rev. 12-2013) Page 4Part IV Late Corporate Classification Election Representations (see instructions)If a late entity classification election was intended to be effective on the same date that the S corporation election was intended to be effective, relieffor a late S corporation election must also include the following representations.1 The requesting entity is an eligible entity as defined in Regulations section 301.7701-3(a);2 The requesting entity intended to be classified as a corporation as of the effective date of the S corporation status;3 The requesting entity fails to qualify as a corporation solely because Form 8832, Entity Classification Election, was not timely filed under Regulations section 301.7701-3(c)(1)(i), or Form 8832 was not deemed to have been filed under Regulations section 301.7701-3(c)(1)(v)(C);4 The requesting entity fails to qualify as an S corporation on the effective date of the S corporation status solely because the S corporation election was not timely filed pursuant to section 1362(b); and5a The requesting entity timely filed all required federal tax returns and information returns consistent with its requested classification as an S corporation for all of the years the entity intended to be an S corporation and no inconsistent tax or information returns have been filed by or with respect to the entity during any of the tax years, orb The requesting entity has not filed a federal tax or information return for the first year in which the election was intended to be effective because the due date has not passed for that year’s federal tax or information return. Form 2553 (Rev. 12-2013)66

Instructions for Form 2553 Department of the Treasury Internal Revenue Service(Rev. December 2013)Election by a Small Business CorporationSection references are to the Internal Revenue Code unless 1.1361-1(j)(12). If these elections were not timely made, seeotherwise noted. Rev. Proc. 2013-30, 2013-36 I.R.B. 173, available at www.irs.gov/irb/2013-36_IRB/ar12.html.Future Developments 4. It has no nonresident alien shareholders.For the latest information about developments related toForm 2553 and its instructions, such as legislation enacted 5. It has only one class of stock (disregarding differencesafter they were published, go to www.irs.gov/form2553. in voting rights). Generally, a corporation is treated as having only one class of stock if all outstanding shares of theWhat's New corporation's stock confer identical rights to distribution and liquidation proceeds. See Regulations section 1.1361-1(l) forNew simplified methods for a corporation (entity) to request details.relief for a late S corporation election, ESBT election, QSSTelection, or corporate classification election are in effect. See 6. It is not one of the following ineligible corporations.Relief for Late Elections. a. A bank or thrift institution that uses the reserve methodGeneral Instructions of accounting for bad debts under section 585.Purpose of Form b. An insurance company subject to tax under subchapter L of the Code.A corporation or other entity eligible to elect to be treated asa corporation must use Form 2553 to make an election under c. A corporation that has elected to be treated as asection 1362(a) to be an S corporation. An entity eligible to possessions corporation under section 936.elect to be treated as a corporation that meets certain testsdiscussed below will be treated as a corporation as of the d. A domestic international sales corporation (DISC) oreffective date of the S corporation election and does not former DISC.need to file Form 8832, Entity Classification Election. 7. It has or will adopt or change to one of the following tax The income of an S corporation generally is taxed to the years.shareholders of the corporation rather than to the corporationitself. However, an S corporation may still owe tax on certain a. A tax year ending December 31.income. For details, see Tax and Payments in theInstructions for Form 1120S. b. A natural business year.Who May Elect c. An ownership tax year.A corporation or other entity eligible to elect to be treated as d. A tax year elected under section 444.a corporation may elect to be an S corporation only if it meetsall the following tests. e. A 52-53-week tax year ending with reference to a year listed above. 1. It is (a) a domestic corporation, or (b) a domestic entityeligible to elect to be treated as a corporation, that timely files f. Any other tax year (including a 52-53-week tax year)Form 2553 and meets all the other tests listed below. If Form for which the corporation establishes a business purpose.2553 is not timely filed, see Relief for Late Elections, later. For details on making a section 444 election or requesting 2. It has no more than 100 shareholders. You can treat a natural business, ownership, or other business purpose taxan individual and his or her spouse (and their estates) as one year, see the instructions for Part II.shareholder for this test. You can also treat all members of afamily (as defined in section 1361(c)(1)(B)) and their estates 8. Each shareholder consents as explained in theas one shareholder for this test. For additional situations in instructions for column K.which certain entities will be treated as members of a family,see Regulations section 1.1361-1(e)(3)(ii). All others are See sections 1361, 1362, and 1378, and their relatedtreated as separate shareholders. For details, see section regulations for additional information on the above tests.1361(c)(1). A parent S corporation can elect to treat an eligible wholly 3. Its only shareholders are individuals, estates, exempt owned subsidiary as a qualified subchapter S subsidiary. Iforganizations described in section 401(a) or 501(c)(3), or the election is made, the subsidiary's assets, liabilities, andcertain trusts described in section 1361(c)(2)(A). items of income, deduction, and credit generally are treated as those of the parent. For details, see Form 8869, Qualified For information about the section 1361(d)(2) election to be Subchapter S Subsidiary Election.a qualified subchapter S trust (QSST), see the instructionsfor Part III. For information about the section 1361(e)(3) When To Make the Electionelection to be an electing small business trust (ESBT), seeRegulations section 1.1361-1(m). For guidance on how to Complete and file Form 2553:convert a QSST to an ESBT, see Regulations section No more than two months and 15 days after the beginning of the tax year the election is to take effect, or At any time during the tax year preceding the tax year it is to take effect. For this purpose, the 2-month period begins on the day of the month the tax year begins and ends with the close of the day before the numerically corresponding day of the second calendar month following that month. If there is noJan 24, 2014 67

corresponding day, use the close of the last day of the 2. The corporation fails to qualify as an S corporationcalendar month. (see Who May Elect, earlier) on the effective date entered on line E of Form 2553 solely because Form 2553 was not filedExample 1. No prior tax year. A calendar year small by the due date (see When To Make the Election, earlier);business corporation begins its first tax year on January 7.The 2-month period ends March 6 and 15 days after that is 3. The corporation has reasonable cause for its failure toMarch 21. To be an S corporation beginning with its first tax timely file Form 2553 and has acted diligently to correct theyear, the corporation must file Form 2553 during the period mistake upon discovery of its failure to timely file Form 2553;that begins January 7 and ends March 21. Because thecorporation had no prior tax year, an election made before 4. Form 2553 will be filed within 3 years and 75 days ofJanuary 7 will not be valid. the date entered on line E of Form 2553; andExample 2. Prior tax year. A calendar year small business 5. A corporation that meets requirements (1) through (4)corporation has been filing Form 1120 as a C corporation but must also be able to provide statements from allwishes to make an S election for its next tax year beginning shareholders who were shareholders during the periodJanuary 1. The 2-month period ends February 28 (29 in leap between the date entered on line E of Form 2553 and theyears) and 15 days after that is March 15. To be an S date the completed Form 2553 is filed stating that they havecorporation beginning with its next tax year, the corporation reported their income on all affected returns consistent withmust file Form 2553 during the period that begins the first day the S corporation election for the year the election should(January 1) of its last year as a C corporation and ends have been made and all subsequent years. Completion ofMarch 15th of the year it wishes to be an S corporation. Form 2553, Part I, column K, Shareholder's ConsentBecause the corporation had a prior tax year, it can make the Statement (or similar document attached to Form 2553), willelection at any time during that prior tax year. meet this requirement; orExample 3. Tax year less than 2 1/2 months. A calendar 6. A corporation that meets requirements (1) through (3)year small business corporation begins its first tax year on but not requirement (4) can still request relief for a lateNovember 8. The 2-month period ends January 7 and 15 election on Form 2553 if the following statements are true.days after that is January 22. To be an S corporationbeginning with its short tax year, the corporation must file a. The corporation and all its shareholders reported theirForm 2553 during the period that begins November 8 and income consistent with S corporation status for the year the Sends January 22. Because the corporation had no prior tax corporation election should have been made, and for everyyear, an election made before November 8 will not be valid. subsequent tax year (if any);Relief for Late Elections b. At least 6 months have elapsed since the date on which the corporation filed its tax return for the first year theThe following two sections discuss relief for late S corporation intended to be an S corporation; andcorporation elections and relief for late S corporation andentity classification elections for the same entity. For c. Neither the corporation nor any of its shareholders wassupplemental procedural requirements when seeking relief notified by the IRS of any problem regarding the Sfor multiple late elections, see Rev. Proc. 2013-30, section corporation status within 6 months of the date on which the4.04. Form 1120S for the first year was timely filed. When filing Form 2553 for a late S corporation election, To request relief for a late election when the abovethe corporation (entity) must write in the top margin of the requirements are not met, the corporation generally mustfirst page of Form 2553 “FILED PURSUANT TO REV. PROC. request a private letter ruling and pay a user fee in2013-30.” Also, if the late election is made by attaching Form accordance with Rev. Proc. 2014-1, 2014-1 I.R.B. 1 (or its2553 to Form 1120S, the corporation (entity) must write in successor).the top margin of the first page of Form 1120S “INCLUDESLATE ELECTION(S) FILED PURSUANT TO REV. PROC. Relief for a Late S Corporation Election Filed By2013-30.” an Entity Eligible To Elect To Be Treated as a Corporation The election can be filed with the current Form 1120S if allearlier Forms 1120S have been filed. The election can be A late election to be an S corporation and a late entityattached to the first Form 1120S for the year including the classification election for the same entity may be available ifeffective date if filed simultaneously with any other delinquent the entity can show that the failure to file Form 2553 on timeForms 1120S. Form 2553 can also be filed separately. was due to reasonable cause. Relief must be requested within 3 years and 75 days of the effective date entered onRelief for a Late S Corporation Election Filed by line E of Form 2553.a Corporation To request relief for a late election, an entity that meetsA late election to be an S corporation generally is effective for the following requirements can explain the reasonable causethe tax year following the tax year beginning on the date in the designated space on page 1 of Form 2553.entered on line E of Form 2553. However, relief for a lateelection may be available if the corporation can show that the 1. The entity is an eligible entity as defined in Regulationsfailure to file on time was due to reasonable cause. section 301.7701-3(a) (see Purpose of Form in the Form 8832 instructions). To request relief for a late election, a corporation thatmeets the following requirements can explain the reasonable 2. The entity intended to be classified as an Scause in the designated space on page 1 of Form 2553. corporation as of the date entered on line E of Form 2553. 1. The corporation intended to be classified as an S 3. Form 2553 will be filed within 3 years and 75 days ofcorporation as of the date entered on line E of Form 2553; the date entered on line E of Form 2553. 4. The entity failed to qualify as a corporation solely because Form 8832 was not timely filed under Regulations section 301.7701-3(c)(1)(i) (see When To File in the Form 68

8832 instructions), or Form 8832 was not deemed to have If the corporation's principal Use the followingbeen filed under Regulations section 301.7701-3(c)(1)(v)(C) business, office, or agency is address or fax number:(see Who Must File in the Form 8832 instructions). located in: 5. The entity fails to qualify as an S corporation (see WhoMay Elect, earlier) on the effective date entered on line E of Connecticut, Delaware, District of Department of theForm 2553 because Form 2553 was not filed by the due date Columbia, Florida, Georgia, Treasury(see When To Make the Election, earlier). Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Internal Revenue Service 6. The entity either: Michigan, New Hampshire, New Center Jersey, New York, North a. Timely filed all Forms 1120S consistent with its Carolina, Ohio, Pennsylvania, Cincinnati, OH 45999requested classification as an S corporation, or Rhode Island, South Carolina, Fax: (859) 669-5748 Tennessee, Vermont, Virginia, b. Did not file Form 1120S because the due date for the West Virginia, Wisconsinfirst year's Form 1120S has not passed. Alabama, Alaska, Arizona, Department of the 7. The entity has reasonable cause for its failure to timely Arkansas, California, Colorado, Treasuryfile Form 2553 and has acted diligently to correct the mistake Hawaii, Idaho, Iowa, Kansas,upon discovery of its failure to timely file Form 2553. Louisiana, Minnesota, Internal Revenue Service Mississippi, Missouri, Montana, Center 8. The S corporation can provide statements from all Nebraska, Nevada, New Mexico,shareholders who were shareholders during the period North Dakota, Oklahoma, Ogden, UT 84201between the date entered on line E of Form 2553 and the Oregon, South Dakota, Texas, Fax: (801) 620-7116date the completed Form 2553 is filed stating that they have Utah, Washington, Wyomingreported their income on all affected returns consistent withthe S corporation election for the year the election should Acceptance or Nonacceptance ofhave been made and all subsequent years. Completion ofForm 2553, Part I, column K, Shareholder's Consent ElectionStatement (or similar document attached to Form 2553), willmeet this requirement. The service center will notify the corporation if its election is accepted and when it will take effect. The corporation will To request relief for a late election when the above also be notified if its election is not accepted. The corporationrequirements are not met, the entity generally must request a should generally receive a determination on its election withinprivate letter ruling and pay a user fee in accordance with 60 days after it has filed Form 2553. If box Q1 in Part II isRev. Proc. 2014-1, 2014-1 I.R.B. 1 (or its successor). checked, the corporation will receive a ruling letter from the IRS that either approves or denies the selected tax year.Where To File When box Q1 is checked, it will generally take an additional 90 days for the Form 2553 to be accepted.Generally, send the original election (no photocopies) or fax itto the Internal Revenue Service Center listed below. If the Care should be exercised to ensure that the IRS receivescorporation files this election by fax, keep the original Form the election. If the corporation is not notified of acceptance or2553 with the corporation's permanent records. However, nonacceptance of its election within 2 months of the date ofcertain late elections can be filed attached to Form 1120S. filing (date faxed or mailed), or within 5 months if box Q1 isSee Relief for Late Elections, earlier. checked, take follow-up action by calling 1-800-829-4933. For the latest mailing address of Form 2553, go to IRS.gov If the IRS questions whether Form 2553 was filed, anand enter \"Where to file Form 2553\" in the search box. acceptable proof of filing is: A certified or registered mail receipt (timely postmarked) from the U.S. Postal Service, or its equivalent from a designated private delivery service (see Notice 2004-83, 2004-52 I.R.B. 1030, available at www.irs.gov/irb/2004-52_IRB/ar10.html (or its successor)); Form 2553 with an accepted stamp; Form 2553 with a stamped IRS received date; or An IRS letter stating that Form 2553 has been accepted. Do not file Form 1120S for any tax year before the ! year the election takes effect. If the corporation is CAUTION now required to file Form 1120, U.S. Corporation Income Tax Return, or any other applicable tax return, continue filing it until the election takes effect. End of Election Once the election is made, it stays in effect until it is terminated or revoked. IRS consent generally is required for another election by the corporation (or a successor corporation) on Form 2553 for any tax year before the 5th tax year after the first tax year in which the termination or 69

revocation took effect. See Regulations section 1.1362-5 for beginning date of the tax year following this short tax yeardetails. and file Form 1128, Application To Adopt, Change, or Retain a Tax Year. If this change qualifies as an automatic approvalSpecific Instructions request (Form 1128, Part II), file Form 1128 as an attachment to Form 2553. If this change qualifies as a ruling requestPart I (Form 1128, Part III), file Form 1128 separately. If filing Form 1128, enter “Form 1128” on the dotted line to the left of theName and Address entry space for item E.Enter the corporation's true name as stated in the corporate Item Fcharter or other legal document creating it. If thecorporation's mailing address is the same as someone Check the box that corresponds with the S corporation'selse's, such as a shareholder's, enter “C/O” and this person's selected tax year. If box (2) or (4) is checked, provide thename following the name of the corporation. Include the additional information about the tax year, and complete Partsuite, room, or other unit number after the street address. If II of the form.the Post Office does not deliver to the street address and thecorporation has a P.O. box, show the box number instead of Signaturethe street address. If the corporation changed its name oraddress after applying for its employer identification number, Form 2553 must be signed and dated by the president, vicebe sure to check the box in item D of Part I. president, treasurer, assistant treasurer, chief accounting officer, or any other corporate officer (such as tax officer)Item A. Employer Identification Number (EIN) authorized to sign.Enter the corporation's EIN. If the corporation does not have If Form 2553 is not signed, it will not be considered timelyan EIN, it must apply for one. An EIN can be applied for: filed. Online–Click on the Employer ID Numbers (EINs) link at Column Jwww.irs.gov/businesses/small. The EIN is issuedimmediately once the application information is validated. Enter the name and address of each shareholder or former shareholder required to consent to the election. If stock of the By telephone at 1-800-829-4933, or at 1-800-829-4059 for corporation is held by a nominee, guardian, custodian, or anindividuals who are deaf, hard of hearing, or have a speech agent, enter the name and address of the person for whomdisability and who have access to TTY/TDD equipment. the stock is held. If a single member limited liability company (LLC) owns stock in the corporation, and the LLC is treated By mailing or faxing Form SS-4, Application for Employer as a disregarded entity for federal income tax purposes,Identification Number. enter the owner's name and address. The owner must be eligible to be an S corporation shareholder. If the corporation has not received its EIN by the time thereturn is due, enter “Applied For” and the date the For an election filed before the effective date entered forcorporation applied in the space for the EIN. For more item E, only shareholders who own stock on the day thedetails, see the Instructions for Form SS-4. election is made need to consent to the election.Item E. Effective Date of Election For an election filed on or after the effective date entered for item E, all shareholders or former shareholders who Form 2553 generally must be filed no later than 2 owned stock at any time during the period beginning on the effective date entered for item E and ending on the day the TIP months and 15 days after the date entered for item election is made must consent to the election. E. For details and exceptions, see When To Make If the corporation timely filed an election, but one or morethe Election, earlier. shareholders did not timely file a consent, see Regulations section 1.1362-6(b)(3)(iii). If the shareholder was aA corporation (or entity eligible to elect to be treated as a community property spouse who was a shareholder solelycorporation) making the election effective for its first tax year because of a state community property law, see Rev. Proc.in existence should enter the earliest of the following dates: 2004-35, 2004-23 I.R.B. 1029, available at www.irs.gov/irb/2004-23_IRB/ar11.html. The date the corporation (entity) first had shareholders(owners), Column K. Shareholder's Consent Statement The date the corporation (entity) first had assets, or Each shareholder consents by signing and dating either in The date the corporation (entity) began doing business. column K or on a separate consent statement. The following special rules apply in determining who must sign. When the corporation (entity) is making the election If an individual and his or her spouse have a community ! for its first tax year in existence, it will usually enter interest in the stock or in the income from it, both must consent.CAUTION the beginning date of a tax year that begins on adate other than January 1. Each tenant in common, joint tenant, and tenant by the entirety must consent. A corporation (entity) not making the election for its firsttax year in existence that is keeping its current tax year A minor's consent is made by the minor, legalshould enter the beginning date of the first tax year for which representative of the minor, or a natural or adoptive parent ofit wants the election to be effective. the minor if no legal representative has been appointed. A corporation (entity) not making the election for its first The consent of an estate is made by the executor ortax year in existence that is changing its tax year and wants administrator.to be an S corporation for the short tax year needed to switchtax years should enter the beginning date of the short taxyear. If the corporation (entity) does not want to be an Scorporation for this short tax year, it should enter the 70

The consent of an electing small business trust (ESBT) is If your business purpose is based on one of the naturalmade by the trustee and, if a grantor trust, the deemed business year tests provided in section 5.03 of Rev. Proc.owner. See Regulations section 1.1362-6(b)(2)(iv) for details. 2002-39, identify which test you are using (the 25% gross receipts, annual business cycle, or seasonal business test). If the stock is owned by a qualified subchapter S trust For the 25% gross receipts test, provide a schedule showing(QSST), the deemed owner of the trust must consent. the amount of gross receipts for each month for the most recent 47 months. For either the annual business cycle or If the stock is owned by a trust (other than an ESBT or seasonal business test, provide the gross receipts from salesQSST), the person treated as the shareholder by section and services (and inventory costs, if applicable) for each1361(c)(2)(B) must consent. month of the short period, if any, and the three immediately preceding tax years. If the corporation has been in existence Continuation sheet or separate consent statement. If for less than three tax years, submit figures for the period ofyou need a continuation sheet or use a separate consent existence.statement, attach it to Form 2553. It must contain the name,address, and EIN of the corporation and the information If you check box Q1, you will be charged a user fee ofrequested in columns J through N of Part I. $2,700 (subject to change by Rev. Proc. 2015-1 or its successor). Do not pay the fee when filing Form 2553. TheColumn L service center will send Form 2553 to the IRS in Washington, DC, who, in turn, will notify the corporation that the fee is due.Enter the number of shares of stock each shareholder ownson the date the election is filed and the date(s) the stock was Box Q2acquired. Enter -0- for any former shareholders listed incolumn J. An entity without stock, such as a limited liability If the corporation makes a back-up section 444 election forcompany (LLC), should enter the percentage of ownership which it is qualified, then the section 444 election will takeand date(s) acquired. effect in the event the business purpose request is not approved. In some cases, the tax year requested under theColumn M back-up section 444 election may be different than the tax year requested under business purpose. See Form 8716,Enter the social security number of each individual listed in Election To Have a Tax Year Other Than a Required Taxcolumn J. Enter the EIN of each estate, qualified trust, or Year, for details on making a back-up section 444 election.exempt organization. Boxes Q3 and R2Column N If the corporation is not qualified to make the section 444Enter the month and day that each shareholder's tax year election after making the item Q2 back-up section 444ends. If a shareholder is changing his or her tax year, enter election or indicating its intention to make the election in itemthe tax year the shareholder is changing to, and attach an R1, and therefore it later files a calendar year return, it shouldexplanation indicating the present tax year and the basis for write “Section 444 Election Not Made” in the top left corner ofthe change (for example, an automatic revenue procedure or the first calendar year Form 1120S it files.a letter ruling request). Part IIIPart II In Part III, the income beneficiary (or legal representative) ofComplete Part II if you checked box (2) or (4) in Part I, Item F. certain qualified subchapter S trusts (QSSTs) may make the QSST election required by section 1361(d)(2). Part III may beNote. Corporations cannot obtain automatic approval of a used to make the QSST election only if corporate stock hasfiscal year under the natural business year (box P1) or been transferred to the trust on or before the date on whichownership tax year (box P2) provisions if they are under the corporation makes its election to be an S corporation.examination, before an appeals (area) office, or before a However, a statement can be used instead of Part III to makefederal court without meeting certain conditions and the election. If there was an inadvertent failure to timely file aattaching a statement to the application. For details, see QSST election, see the relief provisions under Rev. Proc.section 7.03 of Rev. Proc. 2006-46, 2006-45 I.R.B. 859, 2013-30.available at www.irs.gov/irb/2006-45_IRB/ar14.html. Note. Use Part III only if you make the election in Part I.Box P1 Form 2553 cannot be filed with only Part III completed.A corporation that does not have a 47-month period of gross The deemed owner of the QSST must also consent to thereceipts cannot automatically establish a natural business S corporation election in column K of Form 2553.year. Part IVBox Q1 The representations listed in Part IV must be attached to aFor examples of an acceptable business purpose for late corporate classification election intended to be effectiverequesting a fiscal tax year, see section 5.02 of Rev. Proc. on the same date that a late S corporation election was2002-39, 2002-22 I.R.B. 1046, and Rev. Rul. 87-57, 1987-2 intended to be effective. For more information on makingC.B. 117. these late elections, see Relief for a Late S Corporation Election Filed By an Entity Eligible To Elect To Be Treated as Attach a statement showing the relevant facts and a Corporation, earlier.circumstances to establish a business purpose for therequested fiscal year. For details on what is sufficient toestablish a business purpose, see section 5.02 of Rev. Proc.2002-39. 71

Paperwork Reduction Act Notice. We ask for the information on this form to carry out the Internal Revenue laws of theUnited States. You are required to give us the information. We need it to ensure that you are complying with these laws and toallow us to figure and collect the right amount of tax. You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unlessthe form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as longas their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and returninformation are confidential, as required by section 6103. The time needed to complete and file this form will depend on individual circumstances. The estimated average time is:Recordkeeping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 hr., 48 min.Learning about the law or the form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 hr., 33 min.Preparing and sending the form to the IRS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 hr., 1 min. If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, wewould be happy to hear from you. You can write to the Internal Revenue Service, Tax Forms and Publications,SE:W:CAR:MP:TFP, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224. Do not send the form to this address.Instead, see Where To File, earlier.72

8832Form Entity Classification Election(Rev. December 2013) OMB No. 1545-1516Department of the Treasury ▶ Information about Form 8832 and its instructions is at www.irs.gov/form8832.Internal Revenue Service Name of eligible entity making election Employer identification numberType Number, street, and room or suite no. If a P.O. box, see instructions. or City or town, state, and ZIP code. If a foreign address, enter city, province or state, postal code and country. Follow the country’s practice for entering thePrint postal code.▶ Check if: Address change Late classification relief sought under Revenue Procedure 2009-41 Relief for a late change of entity classification election sought under Revenue Procedure 2010-32Part I Election Information1 Type of election (see instructions):a Initial classification by a newly-formed entity. Skip lines 2a and 2b and go to line 3.b Change in current classification. Go to line 2a.2a Has the eligible entity previously filed an entity election that had an effective date within the last 60 months? Yes. Go to line 2b. No. Skip line 2b and go to line 3.2b Was the eligible entity’s prior election an initial classification election by a newly formed entity that was effective on the date of formation? Yes. Go to line 3. No. Stop here. You generally are not currently eligible to make the election (see instructions).3 Does the eligible entity have more than one owner? Yes. You can elect to be classified as a partnership or an association taxable as a corporation. Skip line 4 and go to line 5. No. You can elect to be classified as an association taxable as a corporation or to be disregarded as a separate entity. Go to line 4.4 If the eligible entity has only one owner, provide the following information:a Name of owner ▶b Identifying number of owner ▶5 If the eligible entity is owned by one or more affiliated corporations that file a consolidated return, provide the name and employer identification number of the parent corporation: a Name of parent corporation ▶ Cat. No. 22598R Form 8832 (Rev. 12-2013) b Employer identification number ▶For Paperwork Reduction Act Notice, see instructions. 73

Form 8832 (Rev. 12-2013) Page 2 Part I Election Information (Continued) 6 Type of entity (see instructions):a A domestic eligible entity electing to be classified as an association taxable as a corporation.b A domestic eligible entity electing to be classified as a partnership.c A domestic eligible entity with a single owner electing to be disregarded as a separate entity.d A foreign eligible entity electing to be classified as an association taxable as a corporation.e A foreign eligible entity electing to be classified as a partnership.f A foreign eligible entity with a single owner electing to be disregarded as a separate entity.7 If the eligible entity is created or organized in a foreign jurisdiction, provide the foreign country of organization ▶8 Election is to be effective beginning (month, day, year) (see instructions) . . . . . . . . . . . . ▶9 Name and title of contact person whom the IRS may call for more information 10 Contact person’s telephone number Consent Statement and Signature(s) (see instructions)Under penalties of perjury, I (we) declare that I (we) consent to the election of the above-named entity to be classified as indicatedabove, and that I (we) have examined this election and consent statement, and to the best of my (our) knowledge and belief, thiselection and consent statement are true, correct, and complete. If I am an officer, manager, or member signing for the entity, I furtherdeclare under penalties of perjury that I am authorized to make the election on its behalf.Signature(s) Date Title Form 8832 (Rev. 12-2013) 74

Form 8832 (Rev. 12-2013) Page 3 Part II Late Election Relief 11 Provide the explanation as to why the entity classification election was not filed on time (see instructions).Under penalties of perjury, I (we) declare that I (we) have examined this election, including accompanying documents, and, to the bestof my (our) knowledge and belief, the election contains all the relevant facts relating to the election, and such facts are true, correct,and complete. I (we) further declare that I (we) have personal knowledge of the facts and circumstances related to the election. I (we)further declare that the elements required for relief in Section 4.01 of Revenue Procedure 2009-41 have been satisfied.Signature(s) Date Title Form 8832 (Rev. 12-2013) 75

Form 8832 (Rev. 12-2013) Page 4General Instructions Domestic default rule. Unless an election is entity classification election sought under made on Form 8832, a domestic eligible entity Revenue Procedure 2010-32, is filed andSection references are to the Internal is: attached to the amended tax returns. SeeRevenue Code unless otherwise noted. Rev. Proc. 2010-32, 2010-36 I.R.B. 320 for 1. A partnership if it has two or more details.Future Developments members. DefinitionsFor the latest information about developments 2. Disregarded as an entity separate fromrelated to Form 8832 and its instructions, its owner if it has a single owner. Association. For purposes of this form, ansuch as legislation enacted after they were association is an eligible entity taxable as apublished, go to www.irs.gov/form8832. A change in the number of members of an corporation by election or, for foreign eligible eligible entity classified as an association entities, under the default rules (seeWhat's New (defined below) does not affect the entity’s Regulations section 301.7701-3). classification. However, an eligible entity Business entity. A business entity is anyFor entities formed on or after July 1, 2013, classified as a partnership will become a entity recognized for federal tax purposesthe Croatian Dionicko Drustvo will always be disregarded entity when the entity’s that is not properly classified as a trust undertreated as a corporation. See Notice 2013-44, membership is reduced to one member and a Regulations section 301.7701-4 or otherwise2013-29, I.R.B. 62 for more information. disregarded entity will be classified as a subject to special treatment under the Code partnership when the entity has more than regarding the entity’s classification. SeePurpose of Form one member. Regulations section 301.7701-2(a). Foreign default rule. Unless an election isAn eligible entity uses Form 8832 to elect made on Form 8832, a foreign eligible entity Corporation. For federal tax purposes, ahow it will be classified for federal tax is: corporation is any of the following:purposes, as a corporation, a partnership, oran entity disregarded as separate from its 1. A partnership if it has two or more 1. A business entity organized under aowner. An eligible entity is classified for members and at least one member does not federal or state statute, or under a statute of afederal tax purposes under the default rules have limited liability. federally recognized Indian tribe, if the statutedescribed below unless it files Form 8832 or describes or refers to the entity asForm 2553, Election by a Small Business 2. An association taxable as a corporation if incorporated or as a corporation, bodyCorporation. See Who Must File below. all members have limited liability. corporate, or body politic. The IRS will use the information entered on 3. Disregarded as an entity separate from 2. An association (as determined underthis form to establish the entity’s filing and its owner if it has a single owner that does not Regulations section 301.7701-3).reporting requirements for federal tax have limited liability.purposes. 3. A business entity organized under a However, if a qualified foreign entity (as state statute, if the statute describes or refersNote. An entity must file Form 2553 if making defined in section 3.02 of Rev. Proc. 2010-32) to the entity as a joint-stock company or joint-an election under section 1362(a) to be an S files a valid election to be classified as a stock association.corporation partnership based on the reasonable assumption that it had two or more owners as 4. An insurance company.TIP A new eligible entity should not file of the effective date of the election, and the 5. A state-chartered business entity Form 8832 if it will be using its qualified entity is later determined to have a conducting banking activities, if any of its default classification (see Default single owner, the IRS will deem the election to deposits are insured under the Federal Rules below). be an election to be classified as a Deposit Insurance Act, as amended, 12 U.S. disregarded entity provided: C. 1811 et seq., or a similar federal statute.Eligible entity. An eligible entity is a businessentity that is not included in items 1, or 3 1. The qualified entity's owner and 6. A business entity wholly owned by athrough 9, under the definition of corporation purported owners file amended returns that state or any political subdivision thereof, or aprovided under Definitions. Eligible entities are consistent with the treatment of the entity business entity wholly owned by a foreigninclude limited liability companies (LLCs) and as a disregarded entity; government or any other entity described inpartnerships. Regulations section 1.892-2T. 2. The amended returns are filed before the Generally, corporations are not eligible close of the period of limitations on 7. A business entity that is taxable as aentities. However, the following types of assessments under section 6501(a) for the corporation under a provision of the Codecorporations are treated as eligible entities: relevant tax year; and other than section 7701(a)(3). 1. An eligible entity that previously elected 3. The corrected Form 8832, with the box 8. A foreign business entity listed on pageto be an association taxable as a corporation checked entitled: Relief for a late change of 7. See Regulations section 301.7701-2(b)(8)by filing Form 8832. An entity that elects to be entity classification election sought under for any exceptions and inclusions to items onclassified as a corporation by filing Form 8832 Revenue Procedure 2010-32, is filed and this list and for any revisions made to this listcan make another election to change its attached to the amended tax return. since these instructions were printed.classification (see the 60-month limitationrule discussed below in the instructions for Also, if the qualified foreign entity (as 9. An entity created or organized under thelines 2a and 2b). defined in section 3.02 of Rev. Proc. 2010-32) laws of more than one jurisdiction (business files a valid election to be classified as a entities with multiple charters) if the entity is 2. A foreign eligible entity that became an disregarded entity based on the reasonable treated as a corporation with respect to anyassociation taxable as a corporation under assumption that it had a single owner as of one of the jurisdictions. See Regulationsthe foreign default rule described below. the effective date of the election, and the section 301.7701-2(b)(9) for examples. qualified entity is later determined to have two Disregarded entity. A disregarded entity isDefault Rules or more owners, the IRS will deem the an eligible entity that is treated as an entity election to be an election to be classified as a not separate from its single owner for incomeExisting entity default rule. Certain partnership provided: tax purposes. A “disregarded entity” is treateddomestic and foreign entities that were in as separate from its owner for:existence before January 1, 1997, and have 1. The qualified entity files informationan established federal tax classification returns and the actual owners file original or • Employment tax purposes, effective forgenerally do not need to make an election to amended returns consistent with the wages paid on or after January 1, 2009; andcontinue that classification. If an existing treatment of the entity as a partnership; • Excise taxes reported on Forms 720, 730,entity decides to change its classification, it 2290, 11-C, or 8849, effective for excise taxesmay do so subject to the 60-month limitation 2. The amended returns are filed before the reported and paid after December 31, 2007.rule. See the instructions for lines 2a and 2b. close of the period of limitations onSee Regulations sections 301.7701-3(b)(3) assessments under section 6501(a) for theand 301.7701-3(h)(2) for more details. relevant tax year; and 3. The corrected Form 8832, with the box checked entitled: Relief for a late change of 76

Form 8832 (Rev. 12-2013) Page 5 See the employment tax and excise tax • If an eligible entity classified as a If the entity’s principal Use the followingreturn instructions for more information. partnership elects to be classified as an business, office, or Internal RevenueLimited liability. A member of a foreign association, it is deemed that the partnership agency is located in: Service Centereligible entity has limited liability if the contributes all of its assets and liabilities to address:member has no personal liability for any the association in exchange for stock in thedebts of or claims against the entity by association, and immediately thereafter, the Connecticut, Delaware,reason of being a member. This determination partnership liquidates by distributing the District of Columbia,is based solely on the statute or law under stock of the association to its partners. Florida, Illinois, Indiana,which the entity is organized (and, if relevant, • If an eligible entity classified as an Kentucky, Maine,the entity’s organizational documents). A association elects to be classified as a Maryland, Massachusetts,member has personal liability if the creditors partnership, it is deemed that the association Michigan, New Hampshire,of the entity may seek satisfaction of all or distributes all of its assets and liabilities to its New Jersey, New York, Cincinnati, OH 45999any part of the debts or claims against the shareholders in liquidation of the association,entity from the member as such. A member and immediately thereafter, the shareholders North Carolina, Ohio,has personal liability even if the member contribute all of the distributed assets and Pennsylvania, Rhodemakes an agreement under which another liabilities to a newly formed partnership. Island, South Carolina,person (whether or not a member of the • If an eligible entity classified as an Vermont, Virginia, Westentity) assumes that liability or agrees to association elects to be disregarded as an Virginia, Wisconsinindemnify that member for that liability. entity separate from its owner, it is deemed that the association distributes all of its assets If the entity’s principal Use the followingPartnership. A partnership is a business and liabilities to its single owner in liquidation business, office, or Internal Revenueentity that has at least two members and is of the association. agency is located in: Service Centernot a corporation as defined above under address:Corporation. • If an eligible entity that is disregarded as an entity separate from its owner elects to be Alabama, Alaska, Arizona, Ogden, UT 84201Who Must File classified as an association, the owner of the Arkansas, California, eligible entity is deemed to have contributed Colorado, Georgia, Hawaii,File this form for an eligible entity that is one all of the assets and liabilities of the entity to Idaho, Iowa, Kansas,of the following: the association in exchange for the stock of Louisiana, Minnesota,• A domestic entity electing to be classified as the association. Mississippi, Missouri,an association taxable as a corporation. Montana, Nebraska,• A domestic entity electing to change its Note. For information on the federal tax Nevada, New Mexico,current classification (even if it is currently consequences of elective changes in North Dakota, Oklahoma,classified under the default rule). classification, see Regulations section Oregon, South Dakota,• A foreign entity that has more than one 301.7701-3(g). Tennessee, Texas, Utah,owner, all owners having limited liability, Washington, Wyomingelecting to be classified as a partnership. When To File A foreign country or U.S. Ogden, UT• A foreign entity that has at least one owner Generally, an election specifying an eligible possession 84201-0023that does not have limited liability, electing to entity’s classification cannot take effect morebe classified as an association taxable as a than 75 days prior to the date the election is Note. Also attach a copy to the entity’scorporation. filed, nor can it take effect later than 12 federal income tax return for the tax year of• A foreign entity with a single owner having months after the date the election is filed. An the election.limited liability, electing to be an entity eligible entity may be eligible for late electiondisregarded as an entity separate from its relief in certain circumstances. For more Acceptance or Nonacceptance ofowner. information, see Late Election Relief, later. Election• A foreign entity electing to change itscurrent classification (even if it is currently Where To File The service center will notify the eligible entityclassified under the default rule). at the address listed on Form 8832 if itsDo not file this form for an eligible entity that File Form 8832 with the Internal Revenue election is accepted or not accepted. Theis: Service Center for your state listed later. entity should generally receive a• Tax-exempt under section 501(a); determination on its election within 60 days• A real estate investment trust (REIT), as In addition, attach a copy of Form 8832 to after it has filed Form 8832.defined in section 856; or the entity’s federal tax or information return• Electing to be classified as an S corporation. for the tax year of the election. If the entity is Care should be exercised to ensure that theAn eligible entity that timely files Form 2553 to not required to file a return for that year, a IRS receives the election. If the entity is notelect classification as an S corporation and copy of its Form 8832 must be attached to notified of acceptance or nonacceptance ofmeets all other requirements to qualify as an the federal tax returns of all direct or indirect its election within 60 days of the date of filing,S corporation is deemed to have made an owners of the entity for the tax year of the take follow-up action by callingelection under Regulations section owner that includes the date on which the 1-800-829-0115, or by sending a letter to the301.7701-3(c)(v) to be classified as an election took effect. An indirect owner of the service center to inquire about its status.association taxable as a corporation. electing entity does not have to attach a copy Send any such letter by certified or registered of the Form 8832 to its tax return if an entity in mail via the U.S. Postal Service, or equivalent All three of these entities are deemed to which it has an interest is already filing a copy type of delivery by a designated privatehave made an election to be classified as an of the Form 8832 with its return. Failure to delivery service (see Notice 2004-83, 2004-52association. attach a copy of Form 8832 will not invalidate I.R.B. 1030 (or its successor)). an otherwise valid election, but penalties mayEffect of Election be assessed against persons who are If the IRS questions whether Form 8832 required to, but do not, attach Form 8832. was filed, an acceptable proof of filing is:The federal tax treatment of elective changes • A certified or registered mail receipt (timelyin classification as described in Regulations Each member of the entity is required to file postmarked) from the U.S. Postal Service, orsection 301.7701-3(g)(1) is summarized as the member's return consistent with the entity its equivalent from a designated privatefollows: election. Penalties apply to returns filed delivery service; inconsistent with the entity’s election. • Form 8832 with an accepted stamp; • Form 8832 with a stamped IRS received date; or • An IRS letter stating that Form 8832 has been accepted. 77