SECTION 2. BACKGROUND

Section 1361(a)(1) defines an “S corporation,” with respect to any taxable year, as a small business corporation for which an S election is in effect for that year.

Section 1362(a)(1) provides that, except in a situation described in § 1362(g), a small business corporation may elect to be treated as an S corporation.

Section 1362(b)(1) provides that the corporation may make an election to be treated as an S corporation (A) at any time during the preceding taxable year, or (B) at any time during the taxable year and on or before the 15th day of the 3rd month of the taxable year. Under § 1362(b)(3), if an S corporation election is made for a taxable year after the 15th day of the 3rd month of that taxable year and on or before the 15th day of the 3rd month of the following taxable year, then the S corporation election is treated as made for the following taxable year.

Section 1362(b)(5) provides that if (A) an election under § 1362(a) is made for

Drafting Information

The principal author of this notice is Donna Prestia of the Employee Plans Division. For further information regarding this notice, call (202) 622-6076 between 2:30 and 3:30 p.m. Eastern time (not a toll-free number). Ms. Prestia’s number is (202) 622-7377 (also not a toll-free number).

Nonbank Trustees and Custodians for Education Individual Retirement Accounts

Notice 97–57

(1) Purpose

This notice informs entities already approved to serve as nonbank trustees and custodians of individual retirement accounts (IRAs) that they are also approved to serve as nonbank trustees and custodians of Education IRAs and provides guidance on the procedures for being approved to be a nonbank trustee or custodian of an Education IRA.

(2) Education IRAs

Section 530 of the Internal Revenue Code, added by section 213 of the Ta xpayer Relief Act of 1997, Pub. L. 105–34, provides a new type of tax-free savings vehicle for higher education expenses, called an Education Individual Retirement Account (Education IRA). A t o t a l amount of $500 per year may be contributed to Education IRAs for any beneficiary under the age of 18 years. To contribute the maximum of $500 for a b e n e f i c i a r y, a contributor must have adjusted gross income for the year not ex

ceeding $95,000 ($150,000 for joint returns). The $500 maximum permitted contribution is phased out for contributors with adjusted gross income between $95,000 and $110,000 ($150,000 and $160,000 for joint returns). Education IRAs may be established in taxable years beginning after 1997.

(3) Approval of nonbank trustees and custodians

Under section 530 of the Code, the trustee or custodian of an Education IRA must be a bank (as defined in section 408(n) of the Code) or another person approved by the Internal Revenue Service. Section 1.408–2(e) of the Income Ta x Regulations sets forth the rules which an entity must meet to be approved by the Service as a nonbank trustee or custodian of an individual retirement account (IRA). Pursuant to this notice, any entity already approved by the Service to be a nonbank trustee or custodian of an IRAi s automatically approved by the Service to be a nonbank trustee or custodian of an Education IRA. In addition, entities other than banks or previously approved nonbank IRA trustees or custodians may request approval to be a trustee or custodian of an Education IRA in accordance with the procedures set forth in section 1.408–2(e) and section 3.10 of Rev. Proc. 97-4, 1997–1 I.R.B. 97, dated January 6, 1 9 9 7.

(4) Drafting information

The principal author of this notice is William Gibbs of the Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). For further information concerning who may be a

1997–43 I.R.B. 19 October 27, 1997

PROC. 97–48.” Attached to the Form 2553 must be a dated declaration signed by an officer of the corporation authorized to sign and all persons who were shareholders at any time during the period that the corporation intended to be an S corporation, attesting (but, in the case of a s h a r e h o l d e r, only with respect to that shareholder) that:

(a) the corporation and the shareholder reported their income (on all affected returns) consistent with S corporation status for the year the S corporation election should have been made, and for every subsequent taxable year; and

(b) “Under penalties of perjury, to the best of my knowledge and belief, the facts presented in support of this election are true, correct, and complete.”

.02 Situation 2: Automatic Relief Where First Intended S Corporation Year Filed as a C Corporation .

(1) Eligibility for Automatic Relief . Automatic relief is available in situation 2 if all of the following conditions are met:

(a) The corporation fails to qualify as an S corporation solely because the Form 2553 (Election by a Small Business Corporation) was not filed timely for a taxable year that began prior to January 1, 1997; (b) The corporation received notification from the Service that the Form 2553 was not filed timely, that the corporation must file as a C corporation for the first taxable year the corporation intended to be an S corporation, and that the election would be treated as an S corporation election for the following taxable year;

(c) The corporation and all of its shareholders reported their income (if any) properly treating the corporation as a C corporation for the first taxable year the corporation intended to be an S corporation;

(d) The corporation and all of its shareholders reported their income consistent with S corporation status for all subsequent years;

(e) The period of limitations on assessment under § 6501(a) has not lapsed for any of the taxable years of the corporation beginning on or after the date the corporation intended to be taxable as an S corporation; and

(f) The period of limitations on assessment under § 6501(a) has not lapsed for any taxable year of any of the corporat i o n ’s shareholders in which any taxable

any taxable year (determined without regard to § 1362(b)(3)) after the date prescribed by § 1362(b) for making the election for the taxable year or no election is made for any taxable year, and (B) the Secretary determines that there was reasonable cause for the failure to timely make the election, the Secretary may treat the election as timely made for the taxable year (and § 1362(b)(3) shall not apply).