PLR 200414004: Missed trust election treated as inadvertent S termination

Number

200414004

Outcome

Approved

Document type

Private Letter Ruling

IRS subject

Inadvertent Terminations

Topics

S corporations

Code sections

§ 1361, § 1362

Ruling dated

December 24, 2003

Publicly released

April 2, 2004

Source

View Official PDF

Apply this to your situation

This page covers one taxpayer's ruling, issued in 2004, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.

About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.

View official IRS release (PDF)

Plain-English summary

An S corporation's shares passed to a trust whose beneficiary intended to elect qualified subchapter S trust status but missed the deadline. The trust was therefore an ineligible shareholder, ending the corporation's S election when it received the shares. The IRS found the termination inadvertent and ruled that S treatment could continue from that transfer date if the beneficiary filed a trust election effective that date within 60 days of the letter. The ruling also depended on the corporation's S election being valid and otherwise uninterrupted. The IRS did not decide whether the corporation or trust met all other eligibility requirements.

Ruling snapshot

Question: Could the corporation keep S status after a missed qualified subchapter S trust election?
Outcome: Approved, conditioned on filing the trust election within 60 days.
Key authorities: IRC §§ 1361(d), 1362(d)(2), 1362(f); Treas. Reg. § 1.1362-4.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200414004
Release Date: 4/2/04
Index Number: 1362.04-00

----------------------------------------------- Person To Contact:
--------------------------------------------- ------------------------, ID No. ------------- Telephone Number:
------------------------
---------------------
------------------------------------
Refer Reply To:
CC:PSI:3 – PLR-141064-03
Date:
-
December 24, 2003
-

LEGEND

X = --------------------------------------------------------------------------------------------
------------------------

d1 = ---------------------

d2 = ----------------------

d3 = ----------------------

State = -----------

Trust = --------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
-----------------------

A = -----------------------------

Shareholders = --------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
PLR-141064-03
2

--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
PLR-141064-03
3

Dear ------------------:

This letter responds to a letter dated July 1, 2003, and subsequent correspondence written on behalf of X by its authorized representative, requesting a ruling under § 1362(f) of the Internal Revenue Code.

FACTS

According to the information submitted, X was incorporated on d1 under the laws of State, and elected to be treated as an S corporation effective d2. The shareholders of X during the relevant period were the Shareholders. Trust received shares of X on d3. A, the income beneficiary of Trust, intended to file an election for Trust to be treated as a qualified subchapter S trust (QSST) under § 1361(d). However, A did not timely file the appropriate election under § 1362(d)(2).

X represents that X has filed its federal income tax returns as though X were an S corporation since d2. X represents that there was no intent to terminate X’s S corporation election and that the failure to file timely the QSST election for Trust was not motivated by tax avoidance or retroactive tax planning. X and its shareholders agree to make any necessary adjustments as may be required by the Commissioner consistent with the treatment of X as an S corporation.

LAW AND ANALYSIS

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

Section 1361(b)(1) defines a “small business corporation” as a domestic corporation which is not an ineligible corporation and which does not (A) have more than 75 shareholders, (B) 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, (C) have a nonresident alien as a shareholder, and (D) have more than one class of stock.
PLR-141064-03
5

Section 1361(c)(2)(A)(i) provides that for purposes of § 1361(b)(1)(B), a trust all of which is treated (under subpart E of part I of subchapter J of chapter 1) as owned by an individual who is a citizen or resident of the United States may be a shareholder. Section 1361(c)(2)(B)(i) provides that for purposes of § 1361(b)(1), in the case of a trust described in § 1361(c)(2)(A)(i), the deemed owner shall be treated as the shareholder.

Section 1361(d)(1) provides that, in the case of a QSST with respect to which a beneficiary makes an election under § 1361(d)(2), the trust is treated as a trust described in § 1361(c)(2)(A)(i), and for purposes of § 678(a), the beneficiary of the trust is treated as the owner of that portion of the trust that consists of stock in an S corporation with respect to which the election under § 1361(d)(2) is made.

Section 1361(d)(2)(A) provides that a beneficiary of a QSST (or the beneficiary's legal representative) may elect to have § 1361(d) apply. Section 1361(d)(2)(D) provides that an election under § 1361(d)(2) may be effective up to 15 days and two months before the date of the election.

Section 1362(f), provides that, if (1) an election under § 1362(a) by any corporation was terminated under § 1362(d)(2); (2) the Secretary determines that the circumstances resulting in such termination were inadvertent, (3) no later than a reasonable period of time after discovery of the circumstances resulting in such termination, steps were taken so that the corporation is a small business corporation; and (4) the corporation and each person who was a shareholder of 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 the period, then, notwithstanding the circumstances resulting in the termination, the corporation shall be treated as continuing to be an S corporation during the period specified by the Secretary.

Section 1.1362-4(b) of the Income Tax Regulations provides that the determination of whether a termination was inadvertent is made by the Commissioner. The corporation has the burden of establishing that under the relevant facts and circumstances the Commissioner should determine that the termination was inadvertent. The fact that the terminating event was not reasonably within the control of the corporation and was not part of a plan to terminate the election, or the fact that the event took place without the knowledge of the corporation, notwithstanding its due diligence to safeguard itself against such an event, tends to establish that the termination was inadvertent.

Section 1.1362-4(d) provides that the Commissioner may require any adjustments that are appropriate. In general, the adjustments required should be
PLR-141064-03
6

consistent with the treatment of the corporation as an S corporation during the period specified by the Commissioner. In the case of a transfer of stock to an ineligible shareholder that causes an inadvertent termination under § 1362(f), the Commissioner may require the ineligible shareholder to be treated as a shareholder of an S corporation during the period the ineligible shareholder actually held stock in the corporation. Moreover, the Commissioner may require protective adjustments that prevent any loss of revenue due to a transfer of stock to an ineligible shareholder (e.g., a transfer to an nonresident alien).

CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that X's election to be treated as an S corporation was terminated on d3, when X's shares were transferred to Trust, an ineligible S corporation shareholder. We also conclude that the termination was inadvertent within the meaning of § 1362(f). Provided that X's S corporation election is valid and is not otherwise terminated under § 1362(d), and provided that A files a QSST election for Trust with the appropriate service center within 60 days from the date of this letter with an effective date of d3, X will be treated as continuing to be an S corporation from d3, and thereafter. A copy of this letter should be attached to the QSST election.

Except for the specific ruling above, no opinion is expressed or implied concerning the federal tax consequences of the facts of this case under any other provision of the Code. Specifically, we express or imply no opinion whether X is otherwise qualified to be an S corporation, or whether Trust is otherwise a valid QSST.

Pursuant to a power of attorney on file with this office, a copy of this letter is being sent to X’s authorized representative.
PLR-141064-03
7

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

Sincerely yours,

James A. Quinn
Senior Counsel, Branch 3
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures (2):
Copy of this letter
Copy for ' 6110 purposes

What does the Code say today, for your facts?

This determination bound one taxpayer and cannot be cited. Ezel checks the current Internal Revenue Code and IRS guidance against your situation, with citations.

Opens in Ezel Pro.

Checks the law as it stands today, not only this page
Cites every source it relies on, so you can verify it
Chat, drafting and research in one workspace