PLR 1045016: Relief for an inadvertent S corporation election termination

Plain-English summary

The IRS determined that a corporation's S corporation election termination was inadvertent. The termination occurred after a trust received shares and its current income beneficiary did not make a timely qualified Subchapter S trust election. The IRS also treated other represented circumstances that may have terminated the election as inadvertent. The corporation will continue to be treated as an S corporation, provided its election is not otherwise terminated, and the trust beneficiary must make the QSST election within 60 days. The ruling matters because it preserves the corporation's S corporation status under the conditions described in the letter.

Ruling snapshot

• Question: May the corporation receive relief under section 1362(f) after an inadvertent S corporation election termination connected to a late QSST election?
• Outcome: Approved
• Key authorities: IRC §§ 1361 and 1362; IRC §§ 643(b), 678(a), and 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201045016 Third Party Communication: None
Release Date: 11/12/2010 Date of Communication: Not Applicable
Index Number: 1362.04-00, 1362.02-03
Person To Contact:
----------------------------------------------------------- ---------------, ID No. -----------------
----------------------------- Telephone Number:
----------------------------------- ---------------------
----------------------------------- Refer Reply To:
CC:PSI:B01
PLR-117403-10
Date: September 30, 2010

LEGEND

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

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

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

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

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

This responds to a letter dated April 19, 2010, submitted on behalf of X by X’s
authorized representative, requesting relief under section 1362(f) of the Internal
Revenue Code (the Code).

FACTS

According to the information submitted and representations within, X was incorporated
on Date 1, under the laws of State. Effective Date 1, X elected to be taxed as an S
corporation. On Date 2, Trust received shares of X. A, the current income beneficiary
of Trust, did not make a timely Qualified Subchapter S Trust (QSST) election causing
an inadvertent termination of X’s S corporation status. In addition, X represents that it
may have terminated due to certain other circumstances.

PLR-117403-10 2

X represents that the Trust has at all times met the requirements of a QSST within the
meaning of § 1361(d)(3).

X represents that its S corporation election termination was inadvertent and was not
motivated by tax avoidance or retroactive tax planning. Further, X represents that X
and its shareholders agree to make any adjustments required as a condition of
obtaining relief under the inadvertent termination rule as provided under § 1362(f) of the
Code that may be required by the Secretary.

LAW AND ANALYSIS

Section 1361(a)(1) of the Code 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) defines a “small business corporation” as 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(d)(1) provides that a QSST whose beneficiary makes an election under §
1362(d)(2) will be treated as a trust described in § 1361(c)(2)(A)(i), and the QSST’s
beneficiary will be treated as the owner (for purposes of § 678(a)) of that portion of the
QSST’s S corporation stock to which the election under § 1361(d)(2) applies. Under §
1361(d)(2)(A), a beneficiary of a QSST may elect to have § 1361(d) apply. Under §
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) provides that for purposes of § 1361(d), the term “qualified
subchapter S trust” means a trust (A) the terms of which require that – (i) during the life
of the current income beneficiary, there shall be only 1 income beneficiary of the trust;
(ii) any corpus distributed during the life of the current 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 that 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(f) provides, in relevant part, that if (1) 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); (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 for which the termination occurred is a small
business corporation; and (4) the corporation for which the termination occurred, and
each person who was a shareholder in such corporation at any time during the period
specified pursuant to § 1362(f), agrees to make the adjustments (consistent with the
treatment of such 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
the termination of X’s S election was inadvertent within the meaning of § 1362(f). In
addition, we conclude that the other circumstances represented by the taxpayer that
may have terminated X’s election were inadvertent. Therefore, X will be treated as an S
corporation effective Date 1 and thereafter, provided X’s S corporation election is not
otherwise terminated under § 1362(d).

Within 60 days from the date of this letter, the current income beneficiary of the Trust
must elect to treat the Trust as a QSST, effective Date 2, with the appropriate service
center. A copy of this letter should be attached to the QSST election.

Except as specifically ruled upon above, we express or imply no opinion concerning the
federal tax consequences of the facts of this case under any other provision of the
Code. Specifically, we express or imply no opinion regarding X’s eligibility to be an S
corporation.

This ruling is directed only to the taxpayer who requested it. According to § 6110(k)(3),
this ruling may not be used or cited as precedent.

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

                                  Sincerely,


                                  David R. Haglund
                                  David R. Haglund
                                  Branch Chief, Branch 1
                                  Office of the Associate Chief Counsel

PLR-117403-10 4

                                 (Passthroughs & Special Industries)

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