IRS’s No-Rule Policy for S Corporations Requires Clarification, AICPA Says

May 7, 2018

  • IRS no longer issues private letter rulings involving certain S Corporation matters
  • Informal policy leaves S corporations without an avenue to remedy various issues that are unique to S corporations, says AICPA’s Tax Executive Committee

Washington, D.C. (May 2, 2018) – The American Institute of CPAs (AICPA) today requested that the Internal Revenue Service (IRS) clarify its informal policy to not issue private letter rulings involving certain S corporation matters to ensure that the no-rule policy does not become too broad.

“The IRS’s private letter ruling process serves a vital function for many taxpayers, especially S corporations,” Annette Nellen, CPA, CGMA, Esq., chair of the AICPA Tax Executive Committee, wrote in the letter.  “With the new informal no-rule policy, many S corporation taxpayers are left without an avenue to remedy various issues that are specifically unique to S corporations.”

Nellen explained that to elect S corporation status, a business must qualify as a small business corporation and file a valid election on Form 2553, Election by a Small Business Corporation.  Certain procedural defects may make an S election invalid if the entity does not qualify as a small business corporation at the time it files its S election, she elaborated.  And, if an entity that validly elected as an S corporation ceases to qualify as a small business corporation, its S election terminates.  However, the IRS may grant a waiver under Internal Revenue Code section 1362(f) of an inadvertent invalid or terminated S election.  Generally to obtain a waiver of an inadvertent invalid or terminated S election, a taxpayer must obtain a private letter ruling from the IRS, she stated.

She noted in the letter that an official from the IRS Office of Associate Chief Counsel (Passthroughs and Special Industries) articulated the IRS’s informal, no-rule policy on three S corporation matters at a March 2017 tax law conference.  Additionally, Nellen wrote that the official stated the policy may expand as issues are raised that the IRS views as “comfort rulings,” or rulings that are not providing protection to taxpayers.

Nellen requested that the IRS:

  • Ensure that the no-rule policy does not become overly broad;
  • Formally define and publish the parameters of the no-rule policy; and
  • Issue a revenue ruling or other authoritative pronouncement to provide clarity for certain S corporation matters on which the IRS will no longer rule.

Nellen suggested six parameters that should be included in the revenue ruling.