On June 3rd, we sent an email blast titled “IRS Exploring Aspects of Rev. Proc. 2022-19, Including the ‘Double Fault’ Rule,” which reported that at the May 2026 ABA Tax Section meeting IRS personnel had unofficially indicated that the IRS is exploring various aspects of Rev. Proc. 2022-19, including the Double Fault rule. You may remember that Rev. Proc. 2022-19 identified situations in which an S election made by an LLC was not effective or had been inadvertently terminated. Potentially, even of more interest, the Rev. Proc. identified situations in which one may have thought the S election had been jeopardized, but it was not (e.g., disproportionate distributions not related to the entity’s organizational documents) and situations where the “wrongful” element [e.g., operating agreements providing that liquidating distributions were to be made in accordance with the positive balances in the members’ capital accounts (often referred to as the “Bad Language”) could be retroactively corrected. The Rev. Proc. allows the taxpayer to self-correct, rather than the necessity of applying for a PLR.
However, as noted by many tax practitioners, along with the ABA Tax Section and the AICPA in their comments to the IRS concerning the Rev. Proc., there were situations covered by the Rev. Proc. that didn’t fall within its helpful posture; but these exceptions did not seem to make sense. We are referring to the “double fault” (which was coined by our very own Chuck Levun) in which the entity’s operating agreement contained the Bad Language and the entity also had made a disproportionate LLC member/shareholder distribution at a time when the entity’s operating agreement contained the Bad Language or the entity had filed its return more than six months after its original due date (without extensions) basically for a tax year in which its operating agreement contained the Bad Language. The Rev. Proc. was clear that no one of these three events, by itself, made the S election invalid (so long as the Bad Language was removed before it was “discovered” by the IRS), but the Bad Language coupled with one of the other two “faults,” negated the entity’s ability to be an S corporation without obtaining a favorable PLR. As an example, it is not uncommon for an S corporation to have insufficient funds to make pro rata distributions to all its members/shareholders to pay their tax liabilities, so funds are distributed to the more needy members/shareholders, with equalizing distributions made at a later date.
For confirmation that the double fault issue exists, look no further than PLR 202627008, which was issued on July 2nd. This PLR, which was reported in the advance sheets on July 3rd, when most of us had started celebrating our country’s 250th anniversary, involved a situation involving both the Bad Language and disproportionate distributions. The IRS ruled favorably on the Bad Language, which was corrected, but did not rule on the disproportionate distributions, in that the latter was corrected by changing the distributions to W-2 compensation (which likely occurred in the same year). This ruling certainly confirms that Rev. Proc. 2022-19 does not cover the double fault issue, given that the taxpayer requested the ruling and the IRS likely would have told the taxpayer that the ruling was not required under the Rev. Proc., had the Rev. Proc. been available to assure continued S corporation status.
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