PLR 1238014: IRS preserves S corporation status after a late QSST election

Plain-English summary

The IRS ruled that an S corporation's election was inadvertently terminated when a trust failed to make a timely QSST election after the death of the original trust owner. The corporation could continue to be treated as an S corporation from the specified date onward, assuming its original election was valid and had not otherwise terminated. The relief was conditional on the beneficiary or legal representative filing a QSST election with the required effective date within 120 days and attaching a copy of the ruling. The IRS expressed no opinion on the corporation's general S corporation eligibility or on whether the trust otherwise qualified as a QSST.

Ruling snapshot

• Question: Can the corporation retain S corporation status after a trust's late QSST election?
• Outcome: Approved
• Key authorities: IRC §§ 1361(d) and 1362(f); Treas. Reg. § 1.1362-4

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201238014 Third Party Communication: None
Release Date: 9/21/2012 Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.04-00 Person To Contact:
------------------------, ID No. -------------------
----------------------------------- ----------------------------------------------------
------------------------------------------------------------ Telephone Number:
---------------------------- ---------------------
--------------------------------- Refer Reply To:
CC:PSI:B02
PLR-114420-12
Date:
May 15, 2012

Legend

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

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

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

     -------------------------------------------------------

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

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

a = ----------------------------

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

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

Date3 = ---------------------

Date4 = ---------------------

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

   This responds to a letter dated March 27, 2012, submitted on behalf of X by X’s

authorized representative, requesting a ruling under § 1362(f) of the Internal Revenue
Code (the Code).

PLR-114420-12 2

   The information submitted states that X was incorporated under the laws of State

on Date1. X elected to be an S corporation effective Date2. During his lifetime, A
transferred a shares of X stock to Trust. X represents that, during the lifetime of A,
Trust was treated as owned by A under subpart E of part I of Subchapter J, and
therefore was an eligible S corporation shareholder under § 1361(c)(2)(A)(i).

   A died on Date3. Under the terms of Trust, upon A’s death, the X stock held by

Trust is to be held for the benefit of A’s spouse, B. Between Date3 and Date4, Trust
was a trust described in § 1361(c)(2)(A)(ii), and therefore was an eligible S corporation
shareholder until Date4.

 X represents that Trust satisfies the requirements to be treated as a Qualified

Subchapter S Trust (“QSST”) under § 1361(d) since Date4, except that Trust did not
make a timely QSST election under § 1361(d)(2).

    X represents that X and X’s shareholders have filed tax returns consistent with X

being an S corporation since Date4. X further represents that the circumstances
resulting in the termination of X’s S corporation election were inadvertent and were not
motivated by tax avoidance or retroactive tax planning. 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.

   Section 1362(f) provides that if (1) an election under § 1362(a) by a 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 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 the termination of X’s S corporation election on Date4 was inadvertent within the
meaning of § 1362(f). We further hold that, pursuant to the provisions of § 1362(f), X
will be treated as continuing to be an S corporation from Date4 and thereafter, provided
that X’s S corporation election was valid and provided that the election was not
otherwise terminated under § 1362(d) for reasons not addressed in this letter. This

PLR-114420-12 3

ruling is contingent upon B (or B’s legal representative) filing a QSST election for Trust,
with an effective date of Date4. The election must be filed with the appropriate service
center within 120 days of the date of this ruling. A copy of this letter should be attached
to the election.

   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. Specifically, no opinion is expressed regarding X’s eligibility to be an S
corporation or the validity of its S corporation election. Further, no opinion is expressed
as to whether Trust qualifies as 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.

    In accordance with the power of attorney on file with this office, copies of this

letter are being sent to X’s authorized representatives.

                                   Sincerely,



                                   Melissa C. Liquerman
                                   Branch Chief, Branch 2
                                   Office of Associate Chief Counsel
                                   (Passthroughs & Special Industries)

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

cc: