PLR 200842037: S corporation status continues after a beneficiary misses a QSST election

Plain-English summary

An S corporation's election terminated when the beneficiary of a shareholder trust failed to make a timely qualified subchapter S trust election. The corporation represented that the failure was inadvertent and not motivated by tax avoidance or retroactive tax planning. The corporation and its shareholders agreed to make any adjustments required to maintain consistent S corporation treatment. The IRS ruled that the termination was inadvertent and treated the corporation as continuously eligible from the termination date forward. The relief requires the trust beneficiary to file the QSST election effective on that date within 60 days of the ruling.

Ruling snapshot

• Question: May the corporation retain continuous S corporation status after the trust beneficiary failed to make a timely QSST election?
• Outcome: Approved. The corporation remains an S corporation if the beneficiary files the required QSST election within 60 days and all other conditions are met.
• Key authorities: IRC §§ 1361, 1362(f).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200842037
Third Party Communication: None
Release Date: 10/17/2008
Date of Communication: Not Applicable
Person To Contact:
Index Number: 1362.04-00
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Telephone Number:
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--------------------------------------------------- Refer Reply To:
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CC:PSI:B02
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PLR-143184-07
Date:
June 27, 2008

X = -------------------------------------------------------------------------------------------------------
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D1 = --------------------
Trust = -------------------------------------------------------------------------------------------------------
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Dear -------------:

This responds to a letter dated September 14, 2007, submitted on behalf of X by its authorized representative, requesting a ruling under § 1362(f) of the Internal Revenue Code.

X made an election to be treated as an S corporation. X’s election was inadvertently terminated effective D1 because the beneficiary of Trust failed to make a timely qualified subchapter S trust (QSST) election. X represents that the termination was not motivated by tax avoidance or retroactive tax planning. X and its shareholders have agreed to make any adjustments that the Commissioner may require, consistent with the treatment of X as an S corporation.

Section 1362(f) provides that if (1) an election under § 1362(a) by any corporation (A) was not effective for the taxable year for which made (determined without regard to § 1362(b)(2)) by reason of a failure to meet the requirements of § 1361(b) or to obtain shareholder consents or (B) was terminated under § 1362(d)(2) or (3), (2) the Secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent, (3) no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination, steps were taken (A) so that the corporation is a small business corporation or (B) to acquire the shareholder consents, 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 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 ineffectiveness or

PLR-143184-07
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termination, the corporation will be treated as an S corporation during the period specified by the Secretary.

Based solely on the facts submitted and the representations made, we conclude that the termination of X’s S corporation election on D1 was inadvertent within the meaning of § 1362(f). We further hold that, pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S corporation from D1 and thereafter, provided X’s S corporation election was valid and provided that the election was not otherwise terminated under § 1361(d). This ruling is conditioned upon the beneficiary of Trust filing a QSST election effective D1 for Trust within sixty days of the date of this letter. A copy of this letter should be attached to the election. If X or its shareholders fail to treat themselves as described above, this ruling is null and void.

Except as specifically ruled above, we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the Code. This ruling is directed only to the taxpayer that requested it. Section 6110(j)(3) provides that it may not be used or cited as precedent. Pursuant to a power of attorney on file, a copy of this letter is being sent to X’s authorized representatives.

Sincerely,

J. THOMAS HINES
Chief, Branch 2
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures: 2
Copy of this letter
Copy for § 6110 purposes