Rev. Proc. 2022-19, issued by the IRS on October 7, 2022, among other significant features, identified situations in which an S election made by an LLC was not effective or had been inadvertently terminated. Just as important, 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 (i.e., the “Bad Language”)] could be retroactively corrected.

However, as noted by 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” (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. For instance, it is not uncommon for an S corporation not to have sufficient 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.

In several of its May “Hill” meetings held by the leadership of the ABA Tax Section’s Partnership/LLC and Real Estate Committees with the IRS’s Passthrough Division after the Rev. Proc. had been issued, the question posed to the IRS was “Why?” To date no official explanation has been provided. However, as it turned out, there is hope for a positive resolution with this unexplained troublesome issue. At the May 2026 ABA Tax Section meeting in Washington D.C., an IRS representative unofficially indicated to Chuck Levun that the IRS was exploring various aspects of Rev. Proc. 2022-19, including the Double Fault rule, so don’t give up. Well, that’s great news, but we still have to wait and see what changes, if any, the IRS determines to make.

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