PLR 200901012: One trust's missed QSST election forgiven, with 60 days to file it

Plain-English summary

An S corporation had a trust become a shareholder. A trust can hold S corporation stock, but only if it fits one of the permitted categories, and for a qualified subchapter S trust that requires the income beneficiary to file an election. The beneficiary here never filed one. The S election therefore terminated on the day the trust acquired the stock, and nobody noticed until later.

Section 1362(f) exists for exactly this. If the termination was inadvertent, the company fixes the problem within a reasonable time, and the company and its shareholders agree to whatever adjustments the IRS requires, the corporation is treated as having stayed an S corporation the whole time. The company represented that it never meant to end the election, that the missed filing was not tax motivated, and that the trust has met the QSST requirements since the day it became a shareholder.

The IRS agreed the termination was inadvertent and restored S status back to that date, on the condition that the beneficiary file the QSST election within 60 days of the letter and attach a copy of the letter to it. The office expressly declined to say whether the corporation is otherwise eligible for S status or whether the trust actually qualifies as a QSST, so the relief rests on the taxpayer's own representations.

This is the single-trust version of the same relief granted in
[PLR 0901024](0901024.md), which forgave six missed QSST elections at once.

The released text carries a few of its own slips, kept here as written: it cites section 1362(d)(2) for the QSST election that section 1361(d)(2) actually governs, recites the pre-2004 75-shareholder limit, and reads "provided that the A files."

Ruling snapshot

• Question: Was an S election's termination inadvertent when a shareholder trust's
  income beneficiary never filed the QSST election?
• Outcome: Approved. Termination treated as inadvertent under section 1362(f) and
  S status continues from the termination date, conditioned on filing the QSST election within 60 days.
• Key authorities: I.R.C. §§ 1361(a)(1), 1361(b)(1), 1361(c)(2), 1361(d)(1)-(3),
  1362(a), 1362(d)(2), 1362(f), 643(b), 678(a).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 200901012
Release Date: 1/2/2009
Index Number: 1362.04-00 Person To Contact:
----------------------------, ID No. -------------
Telephone Number:
-------------------------
--------------------
---------------- Refer Reply To:
--------------------------- CC:PSI:B01 – PLR-118339-08
-------------------------------- Date:
October 01, 2008

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

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

A = ----------------------------------
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Trust = -----------------------------------------------------------------------------------------
--------------------
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Dear ------------:

This responds to a letter dated April 15, 2008, 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, Trust became a shareholder of X. However, A, the income beneficiary of Trust, did not timely file the appropriate election under section 1362(d)(2). As a result of the failure to file the election, X’s S corporation election terminated on Date 2.

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 2 and 2 PLR-118339-08

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.

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 facts submitted and the representations made, we conclude that the termination of X's subchapter S election on Date 2 was inadvertent within the meaning of section 1362(f). Therefore, X will be treated as continuing to be an S corporation from Date 2, and thereafter, provided that the A files 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 the material submitted in support of the request for rulings, it is subject to verification on examination.

Sincerely,

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: