PLR 201208023: IRS grants relief for an inadvertent S corporation termination

Plain-English summary

The IRS ruled that an S corporation election terminated when shares were transferred to a trust whose beneficiary had not timely filed a qualified subchapter S trust election. The termination was inadvertent, so the corporation could continue to be treated as an S corporation, provided the election had otherwise been valid and not separately terminated. The relief required the beneficiary to file the QSST election with an effective date matching the transfer date within 120 days after the ruling date. The ruling did not decide whether the corporation was otherwise eligible to be an S corporation or whether the trust qualified as a QSST.

Ruling snapshot

• Question: Can an S corporation continue its status after an inadvertent termination caused by a late QSST election?
• Outcome: Approved, subject to a timely corrective QSST election
• Key authorities: IRC §§ 1361 and 1362, including §§ 1361(d) and 1362(f)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201208023
Third Party Communication: None
Release Date: 2/24/2012
Date of Communication: Not Applicable
Person To Contact:
Index Number: 1362.04-00
--------------------, ID No. -----------------
Telephone Number:
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-------------------------------------------------------- Refer Reply To:
------------------------------------------------ CC:PSI:B01
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PLR-139920-11
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Date:
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October 27, 2011

Legend

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

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

Trust 2 = ----------------------------------------------
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State = ------

Date 1 = -------

Date 2 = -------

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

Date 4 = -------------------
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Date 5 = -----------------------

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

This responds to a letter dated September 20, 2011, submitted on behalf of X from X’s authorized representative, requesting inadvertent termination relief pursuant to § 1362(f) of the Internal Revenue Code.

Facts

The information submitted states that X was incorporated under the laws of State on Date 1 and elected to be treated as an S corporation, effective Date 2. A, was a shareholder of X. A established a revocable trust, Trust 1, on Date 3. On Date 4, A died. Pursuant to the terms of Trust 1, after A’s death, the trustee of Trust 1 established several other trusts, including Trust 2. Shares of X stock were transferred to Trust 2 on Date 5.

Under the terms of Trust 2, the sole beneficiary of Trust 2 was B. X represents that Trust 2 qualifies as a qualified subchapter S trust (QSST) under § 1361(d). However, B did not file timely a QSST election on behalf of Trust 2. Therefore, X's S corporation election terminated on Date 5. B represents that B reported B's allocable share of Trust 2's income consistent with the treatment of Trust 2 as a QSST on all affected returns.

X represents that the circumstances resulting in the termination of X's S corporation election were inadvertent. 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) 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.
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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 that if -- (1) an election under § 1362(a) by any corporation was terminated under § 1362(d)(2) or (3), (2) the Secretary determines that the circumstances resulting in such termination were inadvertent, (3) no later than a reasonable period of time after discovery of the circumstances resulting in such 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 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 termination, such corporation shall be treated as an S corporation during the period specified by the Secretary.

Conclusion

Based solely on the representations made and the information submitted, we conclude that X's S corporation election terminated under § 1362(d)(2) on Date 5. We also conclude that this termination was inadvertent within the meaning of § 1362(f). Accordingly, pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S corporation from Date 5 and thereafter, provided that X's S corporation election was valid and was not otherwise terminated under § 1362(d).

This ruling is contingent upon B filing a QSST election for Trust 2 with an effective date of Date 5 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.
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Except as specifically ruled above, we express no opinion concerning the federal tax consequences of the transactions described above under any other provision of the Code. Specifically, no opinion is expressed on whether X is otherwise eligible to be treated as an S corporation or whether Trust 2 is eligible to be a QSST under § 1361(d)(3).

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

In accordance with a power of attorney on file with this office, a copy of this letter is being sent to X's authorized representative.

Sincerely,

David R. Haglund
David R. Haglund
Chief, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

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

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