PLR 201228010: IRS restores S corporation status after a missed QSST election

Plain-English summary

An S corporation's election terminated when a trust became a shareholder without filing the required qualified subchapter S trust election. The IRS concluded that the termination was inadvertent and allowed the corporation to be treated as an S corporation from the termination date, provided the trust filed a QSST election effective on that date within 120 days of the ruling. A copy of the ruling had to accompany the QSST election. The IRS did not rule on the corporation's general S corporation eligibility or the trust's eligibility to be a QSST.

Ruling snapshot

• Question: Could the corporation retain S corporation status after a trust shareholder missed its QSST election?
• Outcome: Approved
• Key authorities: IRC §§ 1361(d), 1362(d), and 1362(f); Treas. Reg. § 1.1361-1(j)(6)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201228010
Third Party Communication: None
Release Date: 7/13/2012
Date of Communication: Not Applicable
Person To Contact:
Index Number: 1362.04-00
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Telephone Number:
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Refer Reply To:
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CC:PSI:B02
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Date:
March 26, 2012

Legend

X = ---------------------------------------
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Trust = -----------------------------------------------------------------------------------------
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State = -------------

D1 = ----------------------

D2 = ----------------------

D3 = ----------------------

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

This responds to a letter dated March 14, 2012 submitted on behalf of X by X’s authorized representative, requesting inadvertent termination relief pursuant to § 1362(f) of the Internal Revenue Code.

The information submitted states that X was incorporated under the laws of State on D1. X represents that it timely filed an S corporation election with an effective date of D2.
PLR-111737-12
2

On D3, 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 D3. However, no such election was filed on behalf of Trust. Therefore, the Trust was not a permissible shareholder, and X’s S corporation terminated on D3.

X represents that the termination was not motivated by tax avoidance or retroactive tax planning. X further represents that from D3, 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 any adjustments that the Commissioner may require, consistent with the treatment of X as an S corporation. 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 paragraph (2) or (3) of § 1362(d); (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 event resulting in the ineffectiveness, steps were taken (A) so that the corporation is a small business corporation, or (B) to acquire the required 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 such ineffectiveness, the corporation shall 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 the termination of X's S corporation on D3 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 D3 and thereafter provided that Trust files a QSST election effective D3, 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.
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Pursuant to a power of attorney on file with this office, a copy of this letter is being forwarded to X’s authorized representative.

Sincerely,

Bradford R. Poston
Senior Counsel, Branch 2
(Passthroughs & Special Industries)

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