PLR 1039010: IRS treated a trust beneficiary as owner and approved the trust as an S corporation shareholder

Plain-English summary

A company and its sole shareholder asked whether the shareholder would be treated as the owner of an irrevocable trust that gave the shareholder a limited power to withdraw gifts made to the trust. They also asked whether the trust could hold stock in the company while remaining an eligible S corporation shareholder. The IRS ruled that the shareholder would be treated as the trust owner under IRC § 678 and that the trust would be a permitted S corporation shareholder under § 1361(c)(2)(A)(i), assuming no gift exceeded the amount subject to the withdrawal power. The ruling did not address the company's other S corporation eligibility requirements or the tax treatment of the trust's purchase of company stock.

Ruling snapshot

• Question: Would the beneficiary be treated as the trust owner, and could the trust be an S corporation shareholder?
• Outcome: Approved
• Key authorities: IRC §§ 678, 1361(c)(2)(A)(i), 1362, 2041(b)(2), and 2514(e)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201039010 Third Party Communication: None
Release Date: 10/1/2010 Date of Communication: Not Applicable
Index Number: 678.00-00, 1361.00-00,
1361.03-01 Person To Contact:
-------------------, ID No. -------------
---------------------------- Telephone Number:
------------------------------------ ---------------------
--------------------------- Refer Reply To:
CC:PSI:B02
PLR-109312-10
Date:
June 29, 2010

X = -----------------------------------------------------------------------------------------------------
-----------------------

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

B = --------------------

C = -------------------------

D = ---------------------

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

State = --------------

Date = ----------------------
1
Date = ----------------------
2
Date = ------------------
3
Date = ---------------------
4
n = ---------

Dear --------------------:
PLR-109312-10 2

  This letter responds to a letter dated January 26, 2010, and subsequent

correspondence, submitted on behalf of A and X by their authorized representative,
requesting rulings under §§ 678 and 1361 of the Internal Revenue Code.

    The information submitted states that X was incorporated in State on Date 1. A

is the sole shareholder of X. X filed an election to be treated as an S corporation under
§ 1362 for its taxable year beginning Date 2. On Date 3, B (the donor), C, and D
created Trust and named A and A’s children as Trust’s beneficiaries. Under the trust
agreement, the independent trustee has absolute discretion to distribute part or all of
the net income of Trust as the trustee deems appropriate to any one or more then living
of the beneficiaries, in amounts and proportions as the trustee determines. Under the
trust agreement, Trust is an irrevocable trust with B having expressly renounced and
relinquished all rights, interests, and powers in Trust property.

    Under the trust agreement, whenever a gift is made or is deemed to have been

made to Trust during B’s lifetime, A has the power to withdraw out of the assets of Trust
an amount not to exceed the amount of such gift, provided, however, that the amount
that can be withdrawn by A in any one calendar year is limited to the maximum amount
as to which the power of withdrawal can lapse without the lapse constituting the release
of a general power of appointment under §§ 2041(b)(2) and 2514(e). It is anticipated
that all gifts made to Trust during B’s lifetime will be subject to this withdrawal power.

   On Date 3, B made a gift of cash in the amount of $n to Trust. On Date 4, B

made an additional gift of cash in the amount of $n to Trust. $n is not greater than the
maximum amount as to which the power of withdrawal can lapse without the lapse
constituting the release of a general power of appointment under §§ 2041(b)(2) and
2514(e). A did not exercise the withdrawal power with respect to either the Date 3 or
Date 4 gift. No additional gifts have been made to Trust. Trust contemplates
purchasing stock in X.

   Based on the above facts and representations, A and X request rulings that A will

be treated as the owner of Trust under § 678 and that Trust is a permitted S corporation
shareholder as described in § 1361(c)(2)(A)(i).

    Section 678(a) provides that a person other than the grantor shall be treated as

the owner of any portion of a trust with respect to which: (1) the person has a power
exercisable solely by himself to vest the corpus or the income therefrom in himself, or
(2) the person has previously partially released or otherwise modified such a power and
after the release or modification retains such control as would cause a grantor to be
treated as the owner of such portion of the trust within the principles of §§ 671 to 677,
inclusive.

  Section 677(a) provides, in part, that the grantor shall be treated as the owner of

any portion of a trust, whether or not the grantor is treated as such owner under § 674,
PLR-109312-10 3

whose income without the approval or consent of any adverse party is, or, in the
discretion of the grantor or a non-adverse party, or both, may be (1) distributed to the
grantor or the grantor's spouse; or (2) held or accumulated for future distribution to the
grantor or the grantor's spouse.

   Section 678(b) provides that § 678(a) shall not apply with respect to a power over

income, as originally granted or thereafter modified, if the grantor of the trust is
otherwise treated as the owner under the provisions of subpart E other than § 678.

   In Rev. Rul. 67-241, 1967-2 C.B. 225, the beneficiary of a trust held a

noncumulative power, exercisable solely by the beneficiary, to withdraw certain
amounts of corpus annually from a trust. Rev. Rul. 67-241 holds that, whether or not
the demand power is exercised, the beneficiary is treated under § 678(a) as the owner
of the portion of the trust subject to the demand power while the power is held.

    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 that the term “small business corporation” means a

domestic corporation which is not an ineligible corporation and which does not (A) have
more than 100 shareholders, (B) 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, (C) have a nonresident alien as a shareholder, and (D) have more than 1
class of stock.

   Section 1361(c)(2)(A)(i) provides that for purposes of § 1361(b)(1)(B), a trust all

of which is treated (under subpart E of part I of subchapter J of chapter I) as owned by
an individual who is a citizen or resident of the United States may be a shareholder in
an S corporation. The deemed owner of the trust shall be treated as the shareholder
under § 1361(c)(2)(B)(i).

   Based solely on the information submitted and the representations made, we

conclude that A will be treated as the owner of Trust under § 678 and that Trust is a
permitted S corporation shareholder as described in § 1361(c)(2)(A)(i), assuming no gift
is made to Trust in excess of the amount subject to A’s withdrawal power.

   Except as specifically ruled above, we express no opinion concerning the federal

tax consequences of the transactions described above under any of the provisions of the
Code or regulations. Specifically, no opinion is expressed on whether X is otherwise
eligible to be treated as an S corporation or on the proper treatment of a Trust
purchase of X stock.
PLR-109312-10 4

   This ruling is directed only to the taxpayers that requested it. Section 6110(k)(3)

of the Code 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 A’s

and X’s authorized representative.

                                   Sincerely,



                                   Bradford R. Poston
                                   Acting Chief, Branch 2
                                   Office of Associate Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosures: (2)
Copy of this letter
Copy for section 6110 purposes