PLR 201117008: Relief for an inadvertent S corporation termination

Plain-English summary

The IRS considered an S corporation whose shareholder trust did not timely make the election required for a qualified subchapter S trust. The IRS concluded that the S corporation election terminated on the effective date of the missed election, but that the termination was inadvertent. It allowed the corporation to continue being treated as an S corporation if the beneficiary filed the QSST election with the required effective date within 120 days and the other statutory conditions remained satisfied. The shareholders must account for the corporation's income, basis adjustments, and distributions under §§ 1366 through 1368.

Ruling snapshot

• Question: Could the corporation retain S corporation status after a missed QSST election?
• Outcome: Approved
• Key authorities: IRC §§ 1361(d), 1362(f), 1366, 1367, and 1368

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201117008
Third Party Communication: None
Release Date: 4/29/2011
Date of Communication: Not Applicable
Person To Contact:
Index Number: 1362.04-00, 1362.02-03
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Telephone Number:
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Refer Reply To:
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PLR-130132-10
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Date:
January 13, 2011

LEGEND

X = ---------------------------------------------
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A = ---------------------------------------------

B = ---------------------------------------
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Trust = --------------------------------------------------------------------
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Date 1 = ---------------------------

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

Date 3 = --------------------------

Date 4 = -----------------------

Date 5 = -----------------------

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

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

This responds to a letter dated July 12, 2010, submitted on behalf of X by X’s authorized representative, requesting a ruling under § 1362(f) of the Internal Revenue Code.

FACTS

According to the information submitted, X was incorporated on Date 1, under the laws of State. Effective Date 2, X elected to be taxed as an S corporation.

On Date 3, A, a shareholder of X , transferred his X shares to Trust. Trust was a grantor trust and an eligible shareholder of X under § 1361(c)(2)(A)(i). On Date 4, A died. After A’s death, Trust continued to be an eligible shareholder of X under § 1361(c)(2)(A)(ii).

As of Date 5, Trust was intended to be treated as a qualified subchapter S trust (QSST) however, B, the beneficiary of Trust did not file a timely election to treat Trust as a QSST as of Date 5.

X represents that Trust qualified as a QSST under § 1361(d) as of Date 5 and thereafter. X further represents that the circumstances resulting the failure to file a QSST election for Trust was inadvertent and was not motivated by tax avoidance or retroactive tax planning. 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.

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(c)(2)(A)(i) provides that for purposes of § 1361(b)(1)(B), a trust all of which is treated (under subpart E) as owned by an individual who is a citizen or resident of the United States may be a shareholder.

Section 1362(c)(2)(A)(ii) provides that a trust which was described in § 1361(c)(2)(A)(i) immediately before the death of the deemed owner and which continues in existence after such death, but only for the 2-year period beginning on the day of the deemed

owner's death may be a shareholder.

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 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 X’s S corporation election terminated on Date 5 as a result of the failure to make a timely QSST election for Trust. We further conclude that the termination of X’s S election on Date 5 was inadvertent within the meaning of § 1362(f). Pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S corporation as of Date 5 and thereafter, provided that B files a QSST election for Trust with an effective date of Date 5 with the appropriate service center within 120 days from the date of this letter, and X's S corporation election is not otherwise terminated under § 1362(d). A copy of this letter must be attached to the QSST election.

Accordingly, X’s shareholders, in determining their respective income tax liabilities, must include their pro rata share of the separately and non-separately computed items of X as provided in § 1366, make any adjustments to stock basis as provided in § 1367, and take into account distributions made by X as of provided by § 1368.

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,

Faith Colson
Faith Colson
Senior Counsel, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

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