PLR 1232026: IRS restores S corporation status after a late QSST election

Plain-English summary

An S corporation's stock was transferred to a trust after the death of the trust's original owner. The trust met the requirements for a Qualified Subchapter S Trust, but its beneficiary did not timely file the required QSST election. The IRS ruled that the S corporation election terminated on the transfer date, but that the termination was inadvertent. The corporation could continue to be treated as an S corporation if the beneficiary filed the QSST election effective as of that date within 120 days.

Ruling snapshot

• Question: Could an S corporation receive relief after its stock was held by a trust without a timely QSST election?
• Outcome: Approved.
• Key authorities: IRC §§ 1361(d) and 1362(f); § 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201232026 Third Party Communication: None
Release Date: 8/10/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 1362.04-00 --------------------, ID No. -----------------
Telephone Number:
--------------------
------------------------------------ Refer Reply To:
---------------------------------------------------- CC:PSI:B01
--------------------------------------- PLR-149703-11
--------------------------- Date:
May 04, 2012

Legend

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

A = -------------------------------------------

B = -----------------------------

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

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

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

Date 1 = ----------------

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

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

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

PLR-149703-11 2

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

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

  This responds to a letter dated November 28, 2011, and subsequent

correspondence, 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.

PLR-149703-11 3

   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, in relevant part, 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.

PLR-149703-11 4

   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

cc: