The S Corp with an Evergreen PLR
By Nick S. Pegelow on March 6, 2025
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Nick S. Pegelow
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A Private Letter Ruling is as close as you can get to certainty in the tax world. That’s why the IRS charges up to $43,700 just to look at one. But so long as you don’t misrepresent the facts, a PLR is a binding interpretation of current law on both the IRS and the courts. A favorable ruling can reduce tax-return disclosures and FIN 48 adjustments included in applicable financial statements, among other benefits.
The IRS recently issued a generous PLR that overlooked a blown S-election where the impact was “insignificant and transitory.” The bellwether case of PLR 202506003, published last month, appears to be a lifelong exemption from the S Corp rules.
The S corporation in this ruling offers stock compensation to employees under Section 83. (While Section 83 provides a valuable planning opportunity for employees, it is a risky venture for S Corps. PLRs typically aren't available to sponsoring corporations.) All employees are valid S-corporation shareholders. Following a reorganization under a new parent company, and although the shares are still transferred as before, the transfers are first reclassified as purchases by the new parent under Treas. Regs. 1.83-6 and 1.1032-3. Combined with Section 318’s constructive-ownership provisions, every ineligible shareholder in the affiliated group would blow the S election—if only momentarily.
A single ineligible shareholder is enough to compromise your S Corp status, and a PLR is the appropriate remedy. But to greenlight a plan in perpetuity, using a PLR-sized vehicle, with no requirement to cure the defect, is an opportunity looking for a place to happen.
The future of PLRs beyond S Corporations
Taxpayers can use PLRs in one of two contexts. First, PLRs may be used to resolve ambiguities and contradictions within the Internal Revenue Code. Since the Code is, by all accounts, a model of clarity, this approach has limited practical value.
Second, and more common, are comfort rulings. And it’s this latter type that was expanded last year under Rev. Procs. 2024-1 and -3. Comfort rulings are helpful when, despite reasonable confidence in the outcome, taxpayers want certainty. (PLR 202506003 falls under this category but the extraordinary relief was far from a certainty.) While confirming an established principle of tax law in a high-stakes dispute is comforting to shareholders, it can also reduce or eliminate premiums on reps-and-warranties insurance and preempt some tax-diligence findings.
Beyond S Corps, the IRS has created fertile PLR ground in the tax-free reorganization space. Sections 332, 351, 368, and 1036 transactions were removed from its list of no-rule PLRs, for instance, and provide ample opportunity for proactive taxpayers.
If you have any questions regarding this or any other tax issue, please feel free to contact me at 214-749-2459 or at npegelow@meadowscollier.com.
The IRS recently issued a generous PLR that overlooked a blown S-election where the impact was “insignificant and transitory.” The bellwether case of PLR 202506003, published last month, appears to be a lifelong exemption from the S Corp rules.
The S corporation in this ruling offers stock compensation to employees under Section 83. (While Section 83 provides a valuable planning opportunity for employees, it is a risky venture for S Corps. PLRs typically aren't available to sponsoring corporations.) All employees are valid S-corporation shareholders. Following a reorganization under a new parent company, and although the shares are still transferred as before, the transfers are first reclassified as purchases by the new parent under Treas. Regs. 1.83-6 and 1.1032-3. Combined with Section 318’s constructive-ownership provisions, every ineligible shareholder in the affiliated group would blow the S election—if only momentarily.
A single ineligible shareholder is enough to compromise your S Corp status, and a PLR is the appropriate remedy. But to greenlight a plan in perpetuity, using a PLR-sized vehicle, with no requirement to cure the defect, is an opportunity looking for a place to happen.
The future of PLRs beyond S Corporations
Taxpayers can use PLRs in one of two contexts. First, PLRs may be used to resolve ambiguities and contradictions within the Internal Revenue Code. Since the Code is, by all accounts, a model of clarity, this approach has limited practical value.
Second, and more common, are comfort rulings. And it’s this latter type that was expanded last year under Rev. Procs. 2024-1 and -3. Comfort rulings are helpful when, despite reasonable confidence in the outcome, taxpayers want certainty. (PLR 202506003 falls under this category but the extraordinary relief was far from a certainty.) While confirming an established principle of tax law in a high-stakes dispute is comforting to shareholders, it can also reduce or eliminate premiums on reps-and-warranties insurance and preempt some tax-diligence findings.
Beyond S Corps, the IRS has created fertile PLR ground in the tax-free reorganization space. Sections 332, 351, 368, and 1036 transactions were removed from its list of no-rule PLRs, for instance, and provide ample opportunity for proactive taxpayers.
If you have any questions regarding this or any other tax issue, please feel free to contact me at 214-749-2459 or at npegelow@meadowscollier.com.
