REVENUE RULE 94-43

1994-2 C.B. 198, 1994-27 I.R.B. 8.

Internal Revenue Service
Revenue Ruling

REVOCATION OF REV. RUL. 77-220

June 17, 1994

Section 1361. - S Corporation Defined.

Revocation of Rev. Rul. 77-220. The Service has reconsidered Rev. Rul. 77-220 and concluded that the elections to be treated as S corporations made by separate corporations that were partners in a partnership should be respected. Rev. Rul. 77-220 revoked.

In Rev. Rul. 77-220, 1977-1 C.B. 263, thirty unrelated individuals entered into the joint operation of a single business. The individuals divided into three equal groups of ten individuals and each group formed a separate corporation. The three corporations then organized a partnership for the joint operation of the business. The principal purpose for forming three separate corporations instead of one corporation was to avoid the 10 shareholder limitation of s 1371 of the Internal Revenue Code of 1954 (the predecessor of s 1361) and thereby allow the corporations to elect to be treated as S corporations under Subchapter S.

Rev. Rul. 77-220 concluded that the three corporations should be considered to be a single corporation, solely for purposes of making the election, because the principal purpose for organizing the separate corporations was to make the election. Under this approach, there would be 30 shareholders in one corporation and the election made by this corporation would not be valid because the 10 shareholder limitation would be violated.

The Service has reconsidered Rev. Rul. 77-220 and concluded that the election of the separate corporations should be respected. The purpose of the number of shareholders requirement is to restrict S corporation status to corporations with a limited number of shareholders so as to obtain administrative simplicity in the administration of the corporation's tax affairs. In this context, administrative simplicity is not affected by the corporation's participation in a partnership with other S corporation partners; nor should a shareholder of one S corporation be considered a shareholder of another S corporation because the S corporations are partners in a partnership. Thus, the fact that several S corporations are partners in a single partnership does not increase the administrative complexity at the S corporation level. As a result, the purpose of the number of shareholders requirement is not avoided by the structure in Rev. Rul. 77-220 and, therefore, the election of the corporations should be respected.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 77-220 is hereby revoked.

DRAFTING INFORMATION

This revenue ruling was drafted in the Office of the Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Mary A. Berman or D. Lindsay Russell on (202) 622-3050 (not a toll-free call).

Rev. Rul. 94-43, 1994-2 C.B. 198, 1994-27 I.R.B. 8.