Partnerships converting to corporations can immediately elect S-corp status

A partnership that converts to a corporation at the beginning of the calendar year, under check-the-box regulations or a state law’s formless conversion statute, can now elect S-corp status for the corporation’s first year, the IRS has ruled.

Election effective immediately

The election will be treated as immediately effective, with all transactions on the conversion deemed to take place on December 30 and no intervening C corporation deemed to exist for even one day. This enables the corporation to avoid any earnings or profits issues, built-in capital gains exposure, and the possibility of having an impermissible shareholder that would invalidate its S-corp status.

Conversion under check-the-box regulations

The check-the-box regulations will deem the conversion to take place in two steps. First, the partnership contributes all its assets to the corporation in exchange for stock. It then distributes the stock to its partners in liquidation.

Under the IRS’s new rules, when a partnership elects to convert to a corporation effective January 1, the partnership assets will be deemed to have been contributed to the corporation on the previous day in order to avoid having an impermissible S-corp shareholder issue.

(Rev. Rul. 2009-15)