PLR 200541001: Corporation keeps S status if two trust elections are filed

Plain-English summary

Two shareholders transferred their S corporation shares to trusts for their grandchildren without making qualified subchapter S trust (QSST) elections. The transfers terminated the corporation's S election. The IRS found the termination inadvertent and said the corporation would be treated as continuing its S status if the trust beneficiaries filed QSST elections effective on the transfer date within 60 days. The ruling also required the S election not to terminate for another reason. The IRS did not decide whether the corporation otherwise qualified as an S corporation or whether the trusts qualified as QSSTs.

Ruling snapshot

• Question: Could the corporation keep S status after two trust shareholders missed QSST elections?
• Outcome: Approved, conditioned on timely QSST filings and continued S eligibility.
• Key authorities: IRC §§ 1361(d), 1362(d)(2), 1362(f).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200541001
Third Party Communication: None
Release Date: 10/14/2005
Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B01
PLR-100563-05
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Date:
June 22, 2005

Legend

X = --------------------------------------------------------------
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Y=
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Z = -------------------------------------------------------------------------------------
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A = ----------------------------------------------------
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B = -----------------------------------------------------
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D1 = ----------------------
D2 = --------------------------

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

This responds to the letter dated December 22, 2004, submitted on behalf of X, requesting relief under § 1362(f) of the Internal Revenue Code.

Facts

X made an election to be treated as an S corporation effective D1. On D2, A and B, two of the shareholders of X, created Y and Z, which were trusts for the benefit of their grandchildren, and transferred their X shares to Y and Z. Elections to qualify Y and Z as Qualified Subchapter S Trust (QSST) were not made, causing the termination of X’s S election on D2.

X represents that at all relevant times, X and its shareholders treated X as an S corporation and filed their tax returns accordingly. X and its shareholders agree to
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make any adjustments consistent with the treatment of X as an S corporation as may be required by the Secretary with respect to the period specified by § 1362(f).

Law and Analysis

Section 1361(a)(1) defines an “S corporation” as a small business corporation for which an election under § 1362(a) is in effect.

Section 1361(b)(1) defines a “small business corporation” as a domestic corporation which is not an ineligible corporation which does not (A) have more than 75 shareholders, (B) have as a shareholder a person (other than an estate and other than a trust described in subsection (c)(2)) who is not an individual, (C) have a nonresident alien as a shareholder, and (D) have more than 1 class of stock.

Section 1361(d)(3) provides that the term “qualified subchapter S trust” means a trust – (A) the terms of which requires that – (i) during the life of current income beneficiary, there shall be only 1 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 income beneficiary in the trust shall terminate on the earlier of such 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 such beneficiary, and (B) all of the income (within the meaning of § 643(b)) of which is distributed (or required to be distributed) currently to 1 individual who is a citizen or resident of the United States.

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated whenever the corporation ceases to be a small business corporation.

Section 1362(f) provides that if (1) an election under § 1362(a) by any corporation was terminated under § 1362(d), (2) the Secretary determines that the circumstances resulting in the termination were inadvertent, (3) no later than a reasonable period of time after the discovery of the circumstances resulting in the 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 of inadvertent termination of the S election, agrees to makes such 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 circumstances resulting in the termination, the corporation is treated as an S corporation during the period specified by the Secretary.
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Conclusion

Based solely on the facts submitted and representation made, we conclude that X’s election to be treated as an S corporation terminated on D2. We also conclude that the termination constituted an “inadvertent termination” within the meaning of § 1362(f).

Under the provisions of § 1362(f), X will be treated as continuing to be an S corporation from D2, and thereafter, provided that X’s S corporation election is not otherwise terminated under § 1362(d) and further providing that the beneficiaries of Y and Z file QSST elections for Y and Z, effective D2, with the appropriate service center within 60 days of the date of this letter.

Except as expressly provided herein, no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the Code. In particular, no opinion is expressed as to whether X is an S corporation for federal tax purposes or whether Y and Z are QSSTs under § 1361(d).

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

Pursuant to the power of attorney on file with this office, a copy of this letter will be sent to X’s authorized representative.

Sincerely,

/s/ Dianna K. Miosi

Dianna K. Miosi
Chief, Branch 1
Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosures (2):
Copy of this letter,
Copy for § 6110 purposes