PLR 201217008: IRS restores S corporation treatment after late QSST elections

Plain-English summary

A corporation asked whether it could keep S corporation status after two trusts held its shares without timely qualified subchapter S trust (QSST) elections. The IRS concluded that the S corporation election was initially ineffective, but that the failure was inadvertent under section 1362(f). It allowed the corporation to be treated as an S corporation, and both trusts to be treated as QSSTs, from the specified effective date onward. The relief required the corporation and shareholders to follow the S corporation tax treatment, make required adjustments, and file the QSST elections within 120 days after the ruling.

Ruling snapshot

• Question: Could the corporation and two shareholder trusts receive relief after the trusts' QSST elections were filed late?
• Outcome: Approved
• Key authorities: IRC §§ 1361(a), 1361(b), 1361(c), 1361(d), 1362(a), 1362(d), 1362(f), 1366, 1367, 1368, and 6110; Treas. Reg. § 1.1361-1(j)(6)(ii).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201217008
Third Party Communication: None
Release Date: 4/27/2012
Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B02
PLR-130833-11
Date:
December 6, 2011

X = -----------------------------------------
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D1 = ----------------
D2 = ----------------------
Trust 1 = -----------------------------------------------------------------------------------------
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Trust 2 = ----------------------------------------------------------------
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A = ------------------------------
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B = -----------------
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Dear ----- -------------------:

This responds to a letter dated July 5, 2011 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 in D1 and filed an election to be treated as an S corporation effective D2. Trust 1 and Trust 2 were each shareholders of X on D2. However, the respective income beneficiaries of Trust 1 and Trust 2 failed to make timely and effective qualified subchapter S trust (QSST) elections with respect to Trust 1 and Trust 2. Therefore, X’s S corporation election was ineffective. A was and remains the income beneficiary of Trust 1 and B was and remains the income beneficiary of Trust 2.

X represents that X and each of its shareholders have filed consistent with the treatment of X as an S corporation since D2. X further represents that the failure to properly file a QSST election for either Trust 1 or Trust 2 was not motivated by tax
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avoidance or retroactive tax planning. X and its shareholders have agreed to make any adjustments that the Commissioner may require, consistent with the treatment of X as an S corporation.

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)(B) provides that the term “small business corporation” means a domestic corporation which is not an ineligible corporation and which does not 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.

Section 1361(d)(1) provides that in the case of a QSST for which a beneficiary makes an election under § 1361(d)(2), the trust is treated as a trust described in § 1361(c)(2)(A)(i), and for purposes of § 678(a), the beneficiary of the trust shall be treated as the owner of that portion of the trust that consists of stock in an S corporation with respect to which the election under § 1361(d)(2) is made. Section 1361(d)(2)(A) provides that a beneficiary of a QSST may elect to have § 1361(d)(1) apply.

Section 1.1361-1(j)(6)(ii) of the Income Tax Regulations provides that the current income beneficiary of a QSST must make the election under § 1361(d)(2) by signing and filing with the service center with which the corporation files its income tax returns the applicable form or a statement including the information listed in § 1.1361-1(j)(6)(ii).

Section 1362(d)(2) provides that (A) in general, an election under § 1362(a) shall be terminated whenever (at any time on or after the first day of the first taxable year for which the corporation is an S corporation) such corporation ceases to be a small business corporation and (B) any termination under § 1362(d)(2) shall be effective on and after the date of cessation.

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

Based solely on the facts submitted and the representations made, we conclude that X’s election to be treated as an S corporation was ineffective and that the ineffectiveness was inadvertent within the meaning of § 1362(f). We further conclude that, pursuant to the provisions of § 1362(f), X will be treated as being an S corporation from D2 and thereafter, provided that X is otherwise eligible to be an S corporation and provided that the election was not otherwise terminated under § 1362(d). Both Trust 1 and Trust 2 will be treated as QSSTs from D2 and thereafter.

This ruling is conditioned upon the shareholders of X including in income their pro rata share of the separately stated and nonseparately computed items of X as provided in § 1366, making any adjustments to basis as provided in § 1367, and taking into account any distributions made by X as provided in § 1368. If X or its shareholders fail to treat themselves as described above, this letter ruling shall be null and void.

This ruling is further conditioned upon the respective income beneficiaries filing, with the appropriate service center, QSSTs election effective D2 for Trust 1 and Trust 2. The QSSTs election must be filed within 120 days following the date of this letter and a copy of this letter should be attached to the elections.

Except as specifically set forth above, no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the Code, including whether X is a small business corporation under § 1361(b), or whether either Trust 1 or Trust 2 is a QSST within the meaning of § 1361(d)(3).

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.

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

Sincerely,

Bradford R. Poston
Senior Counsel, Branch 2
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosures: 2
Copy of this letter
Copy for § 6110 purposes