PLR 200227034: Missed trust elections receive S corporation relief

Plain-English summary

An S corporation's shares passed to two trusts after a shareholder died, but the trusts' beneficiaries did not file timely qualified subchapter S trust elections. The IRS found the resulting termination of the corporation's S election inadvertent under section 1362(f). The corporation could continue to be treated as an S corporation from the transfer date if both beneficiaries filed trust elections effective on that date, along with all required consents, within 60 days of the letter. The IRS did not decide whether the corporation otherwise qualified as an S corporation or whether the trusts were valid qualified subchapter S trusts.

Ruling snapshot

• Question: Can the corporation retain S status after its trust beneficiaries missed the trust election deadline?
• Outcome: Approved, conditioned on the trust elections and consents being filed within 60 days
• Key authorities: IRC §§ 1361(d)(2), 1362(d)(2), 1362(f)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200227034
Washington, DC 20224
Release Date: 7/5/2002
Index Number: 1362.04-00
Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:PLR-107634-02
Date:
April 8, 2002

Legend:

X
=

A
=

#a
=

D1
=

D2
=

D3
=

State
=

Trust A
=

Trust B
=

Beneficiary A =

Beneficiary B =

Dear

This responds to your letter dated January 25, 2002, submitted on behalf of X, requesting relief under § 1362(f) of the Internal Revenue Code.

FACTS

X was incorporated on D1 under the laws State. X elected subchapter S status, effective, D2. On D2, A owned #a shares of X. On D3, A died, and the shares of X stock were transferred to Trust A and Trust B. X represents that the Trust A and Trust B qualified as subchapter S trusts (“QSST”s) as defined in § 1361(d)(3). Due to oversights,
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Beneficiary A of Trust A and Beneficiary B of Trust B did not make timely QSST elections under § 1361(d)(2). When counsel discovered these oversights, X submitted this private letter ruling request.

X represents that the transfer of stock to Trust A and Trust B and the subsequent failure of Beneficiary A and Beneficiary B, respectively, to file QSST elections were not motivated by tax avoidance or retroactive tax planning. Further X represents that from D2 until the present, all of the parties believed X to be an S corporation, and filed their respective income tax returns consistently with X’s status as an S corporation.

LAW AND ANALYSIS

Section 1361(a)(1) defines an “S corporation”, with respect to any taxable year, as a small business corporation for which an S election under § 1362(a) is in effect for such year.

Section 1361(b)(1)(B) provides that a small business corporation cannot have as a shareholder a person (other than an estate, a trust described in § 1361(c)(2), or an organization described in § 1361(c)(6)) who is not an individual.

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated whenever (at any time on or after the first day of the taxable year for which the corporation is an S corporation) the corporation ceases to be a small business corporation. The termination is effective on and after the day of the cessation. Section 1362(d)(2)(B).

Section 1362(f), in relevant part, provides that, if: (1) an election under § 1362(a) by any corporation was terminated under § 1362(d); (2) the Secretary determines that the termination was inadvertent; (3) no later than a reasonable period of time after discovery of the event resulting in the termination, steps were taken so that the corporation is once more a small business corporation; and (4) the corporation, and each person who was a shareholder in the corporation at any time during the period specified pursuant to § 1362(f), agrees to make any adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to such period, then, notwithstanding the terminating event, the corporation shall be treated as continuing to be an S corporation during the period specified by the Secretary.

The Committee reports accompanying the Subchapter S Revision Act of 1982 explain § 1362(f) as follows:

If the Internal Revenue Service determines that a corporation’s subchapter S election is inadvertently terminated, the Service can waive the effect of the terminating event for any period if the corporation timely corrects the event and if the corporation and the shareholders agree to be treated as if the election had been in effect for such period.

The committee intends that the Internal Revenue Service be
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reasonable in granting waivers, so that corporations whose subchapter S eligibility requirements have been inadvertently violated do not suffer the tax consequence of a termination if no tax avoidance would result from the continued subchapter S treatment. In granting a waiver, it is hoped that the taxpayers and the government will work out agreements that protect the revenues without undue hardship to taxpayers . . . . It is expected that the waiver may be made retroactive for all years, or retroactive for the period in which the corporation again became eligible for subchapter S treatment, depending on the facts.

S. Rep. No. 640, 97th Cong., 2d Sess. 12-13 (1982), 1982-2 C.B. 718, 723-24; H.R. Rep. No. 826, 97th Cong., 2d Sess. 12 (1982), 1982-2 C.B. 730, 735.

CONCLUSIONS

Based solely on the facts submitted and the representations made, we conclude that X's S corporation election under § 1362(a) was terminated on D3. We also conclude that the termination constituted an inadvertent termination within the meaning of § 1362(f). Pursuant to § 1362(f), X will be treated as continuing to be an S corporation from D3, and thereafter, provided that Beneficiary A of Trust A and Beneficiary B of Trust B file QSST elections with the service center, effective as of D3, and all necessary consents are filed with the service center, within 60 days of the date of this letter. A copy of this letter should be attached to such election.
Except as specifically set forth above, no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the Code. Specifically, no opinion is expressed concerning whether X is a valid S corporation or whether Trust A and Trust B area valid QSSTs for federal tax purposes.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to the taxpayer.

Sincerely,
David R. Haglund
Senior Technician Reviewer, Branch 1
Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosures (2)
Copy of this letter
Copy for § 6110 purposes