[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1362-4]

[Page 728-729]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1362-4  Inadvertent terminations.

    (a) In general. A corporation is treated as continuing to be an S 
corporation during the period specified by the Commissioner if--
    (1) The corporation made a valid election under section 1362(a) and 
the election terminated;
    (2) The Commissioner determines that the termination was 
inadvertent;
    (3) Steps were taken by the corporation to return to small business 
corporation status within a reasonable period after discovery of the 
terminating event; and
    (4) The corporation and shareholders agree to adjustments that the 
Commissioner may require for the period.
    (b) Inadvertent termination. For purposes of paragraph (a) of this 
section, the determination of whether a termination was inadvertent is 
made by the Commissioner. The corporation has the burden of establishing 
that under the relevant facts and circumstances the Commissioner should 
determine that the termination was inadvertent. The fact that the 
terminating event was not reasonably within the control of the 
corporation and was not part of a plan to terminate the election, or the 
fact that the event took place without the knowledge of the corporation, 
notwithstanding its due diligence to safeguard itself against such an 
event, tends to establish that the termination was inadvertent.
    (c) Corporation's request for determination of an inadvertent 
termination. A corporation that believes its election was terminated 
inadvertently may request a determination of inadvertent termination 
from the Commissioner. The request is made in the form of a ruling 
request and should set forth all relevant facts pertaining to the event 
including, but not limited to, the facts described in paragraph (b) of 
this section, the date of the corporation's election under section 
1362(a), a detailed explanation of the event causing termination, when 
and how the event was discovered, and the steps taken to return the 
corporation to small business corporation status.
    (d) Adjustments. The Commissioner may require any adjustments that 
are appropriate. In general, the adjustments required should be 
consistent with the treatment of the corporation as an S corporation 
during the period specified by the Commissioner. In the case of a 
transfer of stock to an ineligible shareholder that causes an 
inadvertent termination under section 1362(f), the Commissioner may 
require the ineligible shareholder to be treated as a shareholder of an 
S corporation during the period the ineligible shareholder actually held 
stock in the corporation. Moreover, the Commissioner may require 
protective adjustments

[[Page 729]]

that prevent any loss of revenue due to a transfer of stock to an 
ineligible shareholder (e.g., a transfer to a nonresident alien).
    (e) Corporation and shareholder consents. The corporation and all 
persons who were shareholders of the corporation at any time during the 
period specified by the Commissioner must consent to any adjustments 
that the Commissioner may require. Each consent should be in the form of 
a statement agreeing to make the adjustments. The statement must be 
signed by the shareholder (in the case of shareholder consent) or a 
person authorized to sign the return required by section 6037 (in the 
case of corporate consent). See Sec. 1.1362-6(b)(2) for persons 
required to sign consents. A shareholder's consent statement should 
include the name, address, and taxpayer identification numbers of the 
corporation and shareholder, the number of shares of stock owned by the 
shareholder, and the dates on which the shareholder owned any stock. The 
corporate consent statement should include the name, address, and 
taxpayer identification numbers of the corporation and each shareholder.
    (f) Status of corporation. The status of the corporation after the 
terminating event and before the determination of inadvertence is 
determined by the Commissioner. Inadvertent termination relief may be 
granted retroactive for all years for which the terminating event was 
effective, in which case the corporation is treated as if its election 
had not terminated. Alternatively, relief may be granted only for the 
period in which the corporation again became eligible for subchapter S 
treatment, in which case the corporation is treated as a C corporation 
during the period for which the corporation was not eligible to be an S 
corporation.

[T.D. 8449, 57 FR 55453, Nov. 25, 1992]