Late QSST election restored S corporation and QSub status

Plain-English summary

A corporation requested relief after the income beneficiary of a trust failed to timely make the election required for qualified subchapter S trust treatment. The failure made the corporation's S election and its subsidiary's qualified subchapter S subsidiary election ineffective. The IRS found the failure inadvertent and allowed the corporation to be treated as an S corporation and the subsidiary as a QSub from the stated effective date. The relief required a timely QSST election and continued compliance with the applicable requirements.

Ruling snapshot

• Question: Whether inadvertent failure to make a timely QSST election invalidated S corporation and QSub elections.
• Outcome: Approved, subject to the stated conditions.
• Key authorities: IRC §§ 1361 and 1362; Treas. Reg. § 1.1361-1(j)(6)(ii).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201235008 Third Party Communication: None
Release Date: 8/31/2012 Date of Communication: Not Applicable
Index Number: 1361.03-02, 1362.04-00
Person To Contact:
---------------------------- ----------------------, ID No. -----------------
------------------------------------------- Telephone Number:
----------------------------------------- ---------------------
------------------------------------ Refer Reply To:
CC:PSI:B01
PLR-152620-11
Date:
May 23, 2012

Legend

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

Y= --------------------

State = --------

Date1 = -------------------

Date2 = ----------------------

Trust = --------------------------------------------------

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

This responds to a letter dated December 15, 2011, and subsequent correspondence,
submitted on behalf of X, requesting a ruling under § 1362(f) of the Internal Revenue
Code.

                                                 FACTS

The information submitted states that X was incorporated under the laws of State on
Date1. X elected to be treated as an S corporation, effective Date2. X has been the
sole shareholder of Y stock at all times since Date2. X elected to treat Y as a qualified
subchapter S subsidiary (QSub) effective Date2.
PLR-152620-11 2

Trust was a shareholder of X on Date2. X represents that Trust is eligible to be a
qualified subchapter S trust (QSST) under § 1361(d) and intended to qualify as a QSST.
However, the income beneficiary of Trust inadvertently failed to timely file the
appropriate election under § 1362(d)(2). Therefore, both X’s S corporation election and
Y’s QSub election were ineffective.

X represents that the circumstances resulting in the ineffectiveness of X’s S corporation
election and Y’s QSub election were inadvertent and were not motivated by tax
avoidance. X also represents that X and its shareholders have filed all returns
consistent with X’s status as an S corporation and Trust’s classification as a QSST
since D2. X and its shareholders have agreed to make such adjustments (consistent
with the treatment of X as an S corporation and Y as a QSub) as may be required by
the Secretary.

                              LAW AND ANALYSIS

Section 1362(a) provides that, except as provided in § 1362(g), a small business
corporation may elect, in accordance with the provisions of § 1362, to be an S
corporation.

Section 1361(a)(1) 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) provides that the term “small business corporation” means 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 one class of stock.

Section 1361(b)(3)(A) provides that, except as provided in regulations prescribed by the
Secretary, for purposes of the Code – (i) a corporation which is a qualified subchapter S
subsidiary shall not be treated as a separate corporation, and (ii) all assets, liabilities,
and items of income, deduction, and credit of a qualified subchapter S subsidiary shall
be treated as assets, liabilities, and such items (as the case may be) of the S
corporation.

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 of part 1 of subchapter J of Chapter 1) as owned by
an individual who is a citizen or resident of the United States may be a shareholder.

Section 1361(d)(1) provides that a QSST whose beneficiary makes an election under
§ 1361(d)(2), will be treated as a trust described in § 1361(c)(2)(A)(i) and the beneficiary
PLR-152620-11 3

of such trust shall be treated as the owner (for purposes of § 678(a)) of that portion of
the trust which 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 (or his legal representative)
may elect to have § 1361(d) apply. Section 1361(d)(2)(D) provides that an election
under § 1361(d)(2) shall be effective up to 15 days and 2 months before the date of the
election.

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

Section 1362(d)(2)(A) provides that an election under § 1362(a) will be terminated
whenever (at any time on or after the 1st day of the 1st taxable year for which the
corporation is an S corporation) such corporation ceases to be a small business
corporation.

Section 1362(f) provides, in 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 information submitted and the representations made, we conclude
that X’s S corporation election and Y’s QSub election were ineffective for the taxable
year beginning Date2. We further conclude that the circumstances resulting in such
ineffectiveness were inadvertent within the meaning of § 1362(f). Accordingly, pursuant
to the provisions of § 1362(f), X will be treated as an S corporation from Date2, provided
X’s S corporation election was otherwise valid and has not otherwise terminated under
§ 1362(d). We further conclude that Y will be treated as a QSub effective Date2,
provided that Y’s QSub election was otherwise valid and has not otherwise terminated.
PLR-152620-11 4

This ruling is contingent upon the beneficiary of Trust filing a QSST election for Trust,
effective Date2, 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 as specifically set forth above, no opinion is expressed concerning the federal
tax consequences of the facts described above under any other provisions of the Code.
Specifically, no opinion is expressed regarding X’s eligibility to be treated as an S
corporation, Y’s eligibility to be treated as a QSub, or Trust’s eligibility to be treated as a
QSST.

This ruling 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 the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                    Sincerely,


                                    Laura C. Fields
                                    Laura C. Fields
                                    Senior Technician Reviewer, Branch 1
                                    Office of the Associate Chief Counsel
                                    (Passthroughs & Special Industries)

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