PLR 200909017: Wrong trust signatures received inadvertent-election relief

Plain-English summary

A trust with a minor beneficiary held stock in an S corporation and qualified as a qualified subchapter S trust. The trustees signed both the corporation's S election and the trust election, but the applicable rules required signatures from the minor beneficiary, a legal representative, or a parent if no representative had been appointed. The IRS found that the resulting invalid S election was inadvertent because the corporation and trust had consistently reported the intended treatment without tax-avoidance motives. It preserved S corporation status if, within 60 days, the corporation filed a new Form 2553 with proper signatures and the beneficiary filed a properly signed trust election.

Ruling snapshot

• Question: Could an S corporation receive relief after trustees, rather than the minor beneficiary or proper representative, signed the required elections?
• Outcome: Approved: the invalid election was inadvertent, subject to corrected filings within 60 days.
• Key authorities: IRC §§ 1361(d) and 1362(a) and (f); Treas. Reg. §§ 1.1361-1(j)(6) and 1.1362-6(b).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200909017
Third Party Communication: None
Release Date: 2/27/2009
Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
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------------------------------------------------- Refer Reply To:
CC:PSI:B3
PLR-133685-08
Date:
November 25, 2008

LEGEND

X = ------------------------------------------------------------------------------------------------------
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State = ------------------

A = ------------------------------------------------------------------------------------------------------
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Trust = ------------------------------------------------------------------------------------------------------
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d1 = ------------------------------------------------------------------------------------------------------
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d2 = -----------------

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

This letter responds to a letter dated July 28, 2008, submitted on behalf of X by its authorized representative, requesting a ruling under § 1362(f) of the Internal Revenue Code.

FACTS

The information submitted provides that X was incorporated on d1 in State and elected to be an S corporation effective d2. One of X’s shareholders is a trust, Trust. X represents that Trust qualifies as a qualified subchapter S trust (QSST). A is the minor beneficiary of Trust.
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During a recent review of X’s records, it was discovered that the trustees of Trust, rather than A or her legal representative or parent, signed both the S corporation election and the QSST election and that, consequently, X’s S corporation election was invalid. Despite the incorrect signatures, since d2, X has filed its federal tax returns as an S corporation and has treated Trust as a QSST under § 1361(d). X represents that its invalid S corporation election was inadvertent, unintended, and not the result of tax avoidance or retroactive tax planning. X and its shareholders agree to make any adjustments consistent with the treatment of X as an S corporation as the Secretary may require.

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) provides, in part, that the term “small business corporation” means a domestic corporation that is not an ineligible corporation and that does not 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.

Section 1361(c)(2)(A)(i) provides that for the 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 of the Internal Revenue Code) as owned by an individual who is a citizen or resident of the United States may be a shareholder in an S corporation.

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), (A) the trust is treated as a trust described in § 1361(c)(2)(A)(i), and (B) for purposes of § 678(a), the beneficiary of the trust is treated as the owner of that portion of the trust which 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 his legal representative) may elect to have § 1361(d)(2) apply.

Section 1.1361-1(j)(6)(i) of the Income Tax Regulations provides that any action required by § 1.1361-1(j) to be taken by a person who is under a legal disability by reason of age may be taken by that person's guardian or other legal representative, or if there be none, by that person's natural or adoptive parent.

Section 1.1361-1(j)(6)(ii) provides that the current income beneficiary of the trust must make the QSST election under § 1361(d)(2) by signing and filing with the service center with which the corporation files its income tax return the applicable form or a statement including the information listed in § 1.1361-1(j)(6)(ii).
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Section 1362(a)(1) provides that, except as provided in § 1362(g), a small business corporation may elect, in accordance with the provisions of § 1362, to be an S corporation.

Section 1362(a)(2) provides that an election under § 1362(a) shall be valid only if all persons who are shareholders in such corporation on the day on which the election is made consent to the election.

Section 1.1362-6(b)(1) provides that except as provided in § 1.1362-6(b)(3)(iii), the election of the corporation is not valid if any required consent is not filed in accordance with the rules contained in § 1.1362-6(b).

Section 1.1362-6(b)(2)(ii) provides that the consent of a minor must be made by the minor or by the legal representative of the minor (or by a natural or an adoptive parent of the minor if no legal representative has been appointed).

Section 1.1362-6(b)(2)(iv) provides that in the case of a trust described in
§ 1361(c)(2)(A) (including a trust treated under § 1361(d)(1)(A) as a trust described in
§ 1361(c)(2)(A)(i)), only the person treated as the shareholder for purposes of
§ 1361(b)(1) must consent to the election.

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

CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that, because X failed to obtain the proper signature on its S corporation election and the QSST election for Trust, X's S corporation election was ineffective beginning d2. We also conclude that the ineffectiveness of X’s S corporation election was an inadvertent invalid election within the meaning of § 1362(f). Under §1362(f), X will be treated as an
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S corporation from d2 and thereafter, provided that X’s S corporation election was otherwise valid and was not otherwise terminated under § 1362(d).

This ruling is conditioned on X, within 60 days of the date of this letter, filing a new Form 2553, Election of a Small Business Corporation, containing the proper signatures, with the appropriate service center with an effective date of d2. Furthermore, A must make a QSST election, containing the proper signature, for Trust effective d2 with the appropriate service center within 60 days of the date of this letter. A copy of this letter should be attached to the new form 2553 and the new QSST election.

Except as expressly provided herein, we express or imply no opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, no opinion is expressed on whether X is otherwise eligible to be an S corporation or whether Trust is a valid QSST.

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

In accordance with the power of attorney on file with this office, we are sending a copy of this letter to your authorized representatives.

Sincerely yours,

/s/

Mary Beth Carchia
Senior Technician Reviewer, Branch 3
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures (2)
A copy of this letter
A copy for § 6110 purposes

cc: