Converting C Corp. to S Corp. Mid year

[Unregistered]

Can a C Corp. be converted to an S Corp. mid year? I have a taxpayer that wanted to convert his C Corp. to an S Corp. as of January 1, 2005 but forgot to send in his election. We filed the election December 15 in hope of being able to go back 75 days but just received a letter saying we can not create a short year with the election. I'm almost positive I had done this before with another client (but maybe he was not a Corp. I cant remember). Any help would be appreciated.

BTW - This C Corp. was not created this year. The company has been a C Corp. for over 10 years.

[Unregistered]

C to S-Corp

You can't create a short year with the election. Has to be requested within 75 days of the start of the tax year to be effective that year, otherwise it is effective with the start of the next tax year.

[OldJack]

Depending upon the assets of the C-corp you may not really want to elect S-corp. All assets as of the date of election has to be valued at fair market value and gain or loss (called built-in gain) determined as though the asset was sold. This built-in gain or loss will be recognized and the S-corp required to pay a tax on the "built-in gain" (subject to C-corp determined taxable income) when the asset is sold if within 10 years. The actual gain on the date of sale will still be taxed to the S-corp shareholder thereby creating the double tax that would have occured if the asset was sold by a C-corp. In all likelyhood the built-in gain, taxed to the S-corp, may be greater than the actual gain sold in later years as the fair market value when actual sold will be less than the fair market value when you made the election. Assets valued would include those not recorded on the books because of cash basis such as inventory and receivables.

You have until March 15, 2006 to elect S-corp status for the calander year 2006. It is to late to elect for 2005.

[Unregistered]

You can't create a short year with the election. Has to be requested within 75 days of the start of the tax year to be effective that year, otherwise it is effective with the start of the next tax year.

Really? Does this only pertain to C Corps converting to S Corps? I had a client that was a Schedule C filer and we converted him to an LLC being taxed as an S Corp. and they simply went back 75 days (i.e. one short year for the Schedule C and one short year for the S Corp.).

The taxpayer originally wanted to become as S Corporation effective January 1, 2005 but the paper work never got filed. He came to me December 15th and we were simply trying to get the election effictive October 1, 2005 (within 75 days). I know they allow some relief for late elections if filed within 18 months of the original due date. Has anyone had any success with this? if so, what did you use for "reasonable cause"? If we can not get the 10/01/2005 effective date I would like to get the 1/1/2005 date if possible.

Any help would be appreciated.

[OldJack]

Your election for the LLC was for a new organization electing from the beginning of its year to the end of a calender year (required year) and had nothing to do with the 1040 Sch-C business (other than the Sch-C assets were maybe transferred to the LLC).

[Matt Sova]

S-Corp can STILL be elected for 05

File the election pursuant to Rev Proc 2003-43. See page 19-4 in TTB Deluxe Edition.

[Unregistered]

File the election pursuant to Rev Proc 2003-43. See page 19-4 in TTB Deluxe Edition.

Thanks.. Just wondered what would be deemed "reasonable cause". He thought it was done but wasn't. Anyone have any suggestions, experiences?

Thanks in advance.

[Matt Sova]

Reasonable cause

Dear IRS

I thought my (pick your poison - atty, acct, etc) had filed this election. Upon review of our records it appears that this was not done. Since I relied on professional help I ask that you accept this as being timely filed under the aforementioned Rev Proc.

Sincerely

Johnny Late Filer

I swear I think you could put in that your dog ate it and they would accept it.

Matt

[rosieea]

Thanks.. Just wondered what would be deemed "reasonable cause". He thought it was done but wasn't. Anyone have any suggestions, experiences?

Thanks in advance.

I have received late election on 2 occasions using as a reason that the taxpayer relied on his attorney who had indicated that the election would be filed.