PLR 201245014: IRS restores S corporation status after an inadvertent termination

Plain-English summary

The IRS ruled that a corporation's S corporation election was inadvertently terminated when its trust shareholders stopped qualifying as qualified subchapter S trusts. The corporation represented that the termination was not motivated by tax avoidance or retroactive tax planning and that the trustees took steps to correct the shareholder problem. The IRS treated the corporation as continuing to be an S corporation from the termination date, and treated the trusts as qualified subchapter S trusts during the period they held the corporation's stock. The ruling requires the corporation and its shareholders to report the corporation consistently with S corporation status and make required tax adjustments.

Ruling snapshot

• Question: Could the corporation's S corporation status continue after its election was inadvertently terminated because its trust shareholders failed to qualify as QSSTs?
• Outcome: Approved, the termination was treated as inadvertent and S corporation status was restored
• Key authorities: IRC §§ 1361, 1362(f), 1366, 1367, and 1368

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201245014
Third Party Communication: None
Release Date: 11/9/2012
Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
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Refer Reply To:
CC:PSI:B03
PLR-115843-12
Date: June 28, 2012

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Trusts = --------------------------------------------------------------------------------
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D2 = ----------------------------

PLR-115843-12
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Dear ---------------:

This responds to a letter dated March 2, 2012, submitted on behalf of X by its authorized representative requesting a ruling under § 1362(f) of the Internal Revenue Code.

X made an election to be treated as an S corporation. X’s election was inadvertently terminated effective D1, when the Trusts ceased to qualify as eligible shareholders for each failing to satisfy the requirements of a qualified subchapter S trust (“QSST”). Prior to D2, the trustees of the Trusts took steps to ensure that the trusts again satisfied the requirements for being QSSTs. X represents that the termination was not motivated by tax 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 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 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 D1 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 D1 and thereafter, provided X’s S corporation election was valid and provided that the election was not otherwise terminated under § 1361(d). Moreover, each of the Trusts will be treated as a QSST during the period for which it held X stock.

This ruling is conditioned upon X and all its shareholders treating X as having been an S corporation for the termination period and thereafter. Moreover, the

PLR-115843-12
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shareholders of X must include their pro rata share of the separately stated and nonseparately computed items of income, loss, deduction, or credit as provided in
§ 1366, make any adjustments to basis as provided in § 1367, and take into account any distributions made by X as provided in § 1368. If X or its shareholders fail to treat themselves as described above, this ruling is null and void.

Except as specifically ruled above, we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the Code. This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent. Pursuant to a power of attorney on file, we are sending a copy of this letter to X’s authorized representative.

Sincerely,

/s/

Richard T. Probst
Senior Technician Reviewer, Branch 3
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

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