PLR 200538006: Missed trust election treated as inadvertent S termination

Plain-English summary

An S corporation shareholder placed shares in a trust and later died. The trust’s income beneficiary did not timely elect qualified subchapter S trust (QSST) treatment, causing the corporation’s S election to terminate. The IRS accepted the corporation’s representations that the lapse was unintended and that the trust complied with the QSST requirements. It ruled the termination inadvertent and said the corporation would continue to be treated as an S corporation if the trust beneficiaries filed a QSST election within 60 days of the letter. The IRS did not decide whether the corporation or trust otherwise met the requirements for those statuses.

Ruling snapshot

• Question: Could the corporation keep S status after the trust missed its QSST election?
• Outcome: Approved as an inadvertent termination, conditioned on filing the QSST election within 60 days.
• Key authorities: IRC §§ 1361(d), 1362(f).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200538006
Release Date: 9/23/2005
Index Number: 1362.04-00

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Person To Contact:
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------------------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
CC:PSI:B01 – PLR-112409-05
Date:
June 16, 2005

X = --------------
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Date 1 = -----------------------

Date 2 = --------------------------

Date 3 = -----------------------

Date 4 = ------------------------

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

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

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

This responds to a letter dated February 15, 2005, and additional correspondence, submitted on behalf of X, requesting a ruling under section 1362(f) of the Internal Revenue Code.

Facts

X elected to be taxed as an S corporation effective Date 1. On Date 2, A, an original shareholder of X, transferred all A’s shares of X to Trust. During A's life, A had the power to revoke, modify or alter Trust. A died on Date 3.

The income beneficiary intended to file an election for Trust to be treated as a Aqualified subchapter S trust@ (QSST) under section 1361(d). However, the income

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beneficiary did not timely file the appropriate election under 1362(d)(2). As a result of the failure to file this election, X’s S corporation election terminated on Date 4.

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 also represents that since Date 3 and thereafter, Trust has complied with the requirements under section 1361(d), which defines a QSST.

X and its shareholders agree to make any adjustments required by the Secretary 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 section 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 section 1361(c)(2), or an organization described in section 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.

Section 1361(d)(1) provides that a QSST whose beneficiary makes an election under section 1362(d)(2) will be treated as a trust described in section 1361(c)(2)(A)(i), and the QSST's beneficiary will be treated as the owner (for purposes of section 678(a)) of that portion of the QSST's S Corporation stock to which the election under section 1361(d)(2) applies. Under section 1361(d)(2)(A), a beneficiary of a QSST may elect to have section 1361(d) apply. Under section 1361(d)(2)(D), this election will be effective up to 15 days and two months before the date of the election.

Section 1361(d)(3) defines a QSST as a trust (A) the terms of which require that (i) during the life of the current income beneficiary, there shall be only one income beneficiary of the trust; (ii) any corpus distributed during the life of the current income beneficiary may be distributed only to such beneficiary; (iii) the income interest of the current beneficiary in the trust shall terminate on the earlier of the beneficiary's death or the termination of the trust; and (iv) upon the termination of the trust during the life of the current income beneficiary, the trust shall distribute all of its assets to that beneficiary; and (B) all of the income (within the meaning of section 643(b) of which is distributed (or required to be distributed) currently to one individual who is a citizen or resident of the United States.

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Section 1362(f) provides, in relevant part, that if (1) an election under section 1362(a) by any corporation was not effective for the taxable year for which made (determined without regard to section 1362(b)(2)) by reason of a failure to meet the requirements of section 1361 (b) or to obtain shareholder consents, (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 ineffectiveness, 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 of the corporation at any time during the period specified pursuant to section 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 ineffectiveness, the corporation shall be treated as continuing to be an S corporation during the period specified by the Secretary.

Conclusion

Based solely on the information submitted and the representations made, we conclude that X's subchapter S election terminated because a QSST election was not filed for Trust . In addition, we conclude that the termination was inadvertent within the meaning of section 1362(f). Therefore, X will be treated as continuing to be an S corporation from Date 4, and thereafter, provided that the beneficiaries for Trust file a QSST election with the appropriate service center within 60 days of the date of this letter. A copy of this letter should be attached to the QSST election.

Except as specifically set forth above, we express no opinion 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 otherwise eligible to be treated as an S corporation or whether Trust is eligible to be treated as a QSST.

This ruling is directed only to the taxpayer(s) requesting it. Section 6110(k)(3) of the Code 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 your representative.

The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of

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the material submitted in support of the request for rulings, it is subject to verification on examination.

Sincerely,

/s/David R. Haglund

David R. Haglund
Senior Technician Reviewer
Office of Associate Chief Counsel

(Passthroughs & Special Industries)

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

cc: