PLR 201050019: IRS disregarded an inadvertent S corporation termination

Plain-English summary

The IRS ruled that a corporation's S corporation election was inadvertently terminated when a trust became a shareholder without filing a timely QSST election. The corporation represented that the trust was eligible to make the election, that the termination was not motivated by tax avoidance, and that the corporation and its shareholders had filed returns consistent with S corporation treatment. The IRS treated the corporation as an S corporation from the termination date onward, provided that the trust filed a QSST election effective on that date within 120 days of the ruling. The corporation and its shareholders also had to make any adjustments required by the Secretary.

Ruling snapshot

• Question: Could the corporation continue to be treated as an S corporation after a trust became a shareholder without filing a QSST election?
• Outcome: approved
• Key authorities: IRC §§ 1361 and 1362; Treas. Reg. § 1.1361-1(j)(6)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201050019
Third Party Communication: None
Release Date: 12/17/2010
Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
--------------------------------------
-------------------, ID No. -------------
------------------------------
Telephone Number:
-----------------------------
---------------------
------------------------------
Refer Reply To:
CC:PSI:B02
PLR-122220-10
Date:
September 13, 2010

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

State = --------

Date = ---------------------------
1
Date = --------------------------
2
Trust = -----------------------------------------------------------------------------------------------------
-----------------------

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

This responds to a letter dated May 4, 2010, and subsequent correspondence, submitted on behalf of X by its authorized representative, requesting a ruling under § 1362(f) of the Internal Revenue Code.

The information submitted states that X was incorporated under the laws of State on Date 1. X represents that it timely filed an S corporation election with an effective date of Date 1. On or about Date 2, Trust became a shareholder of X. X represents that Trust was a qualified subchapter S trust (QSST) eligible to make an election under § 1361(d)(2) effective Date 2. However, no such election was filed on behalf of Trust. Therefore, Trust was not a permissible shareholder, and X’s S corporation terminated on or about Date 2.
PLR-122220-10
2

X represents that the circumstances resulting in the termination of X’s S corporation election were inadvertent and not motivated by tax avoidance. X further represents that from Date 2, X and its shareholders have filed all returns consistent with X’s status as an S corporation. X and its shareholders have agreed to make such adjustments consistent with the treatment of X as an S corporation as may be required by the Secretary.

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

Based solely on the information submitted and the representations made, we conclude that the termination of X’s S corporation election on or about Date 2 was inadvertent within the meaning of § 1362(f). We further hold that, pursuant to the provisions of § 1362(f), X will be treated as an S corporation from Date 2 and thereafter, provided that Trust files a QSST election effective Date 2, pursuant to the procedures set forth in § 1.1361-1(j)(6), with the appropriate service center within 120 days of the date of this letter. A copy of this letter should be attached to the QSST election.

Except for the specific ruling above, no opinion is expressed or implied concerning the federal tax consequences of the facts of this case under any other provision of the Code. Specifically, no opinion is expressed or implied regarding X’s eligibility to be an S corporation or Trust’s eligibility to be a QSST.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
PLR-122220-10
3

Pursuant to a power of attorney on file with this office, copies of this letter are being forwarded to X’s authorized representatives.

Sincerely,

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

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

cc: