PLR 1247008: IRS treats an inadvertently terminated S corporation election as continuing

Plain-English summary

A corporation's S corporation election terminated when a trust shareholder failed to make a timely electing small business trust election. The IRS ruled that the termination was inadvertent and treated the corporation as an S corporation from the termination date onward, assuming the corporation remained otherwise eligible. The trust was treated as an electing small business trust from that date, subject to filing the required election within 120 days and making the specified payment and adjustments. The ruling was based on the taxpayer's representations and did not express an opinion on the corporation's general S corporation eligibility or the trust's ESBT qualification beyond the stated relief.

Ruling snapshot

• Question: Could the IRS restore S corporation treatment after a trust shareholder failed to timely make an ESBT election?
• Outcome: Approved
• Key authorities: IRC §§ 1361, 1362, and 6110

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201247008 Third Party Communication: None
Release Date: 11/23/2012 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
---------------------------------- ----------------------, ID No. -----------------
---------------------------------------------- Telephone Number:
------------------------------ ---------------------
----------------------------- Refer Reply To:
CC:PSI:B02
PLR-125893-12
Date:
August 13, 2012

                                                 Legend

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

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

State = ---------

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

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

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

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

n = -------------

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

  This responds to a letter dated June 9, 2012, and subsequent correspondence,

submitted on behalf of X by its authorized representative, requesting a ruling under
§ 1362(f) of the Internal Revenue Code.

   The information submitted states that X was formed in State on Date 1, and

made an election to be treated as an S corporation effective Date 1. A transferred
shares of X to Trust on Date 2. However, the trustee of Trust failed to make a timely
and effective electing small business trust (ESBT) election with respect to Trust.
Therefore, X's S corporation election terminated on Date 2.
PLR-125893-12 2

   X represents that X and each of its shareholders have filed consistently with the

treatment of X as an S corporation since Date 2. X further represents that the failure to
properly file the ESBT election for Trust 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 1361(a)(1) of the Code 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)(B) provides that the term “small business corporation” means

a domestic corporation which is not an ineligible corporation and which does not 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.

   Section 1361(e) defines an ESBT. Section 1361(e)(1)(A) provides that, except

as provided in § 1362(e)(2)(B), an ESBT means any trust if (i) such trust does not have
as a beneficiary any person other than (I) an individual, (II) an estate, (III) an
organization described in § 170(c)(2), (3), (4), or (5), or (IV) an organization described in
§ 170(c)(1) which holds a contingent interest in such trust and is not a PCB, (ii) no
interest in such trust was acquired by purchase, and (iii) an election under § 1361(e)
applies to such trust. Section 1361(e)(3) provides that an election under § 1361(e) shall
be made by the trustee.

    Section 1.1361-1(m)(2)(i) provides that the trustee of an ESBT must make the

ESBT election by signing and filing, with the service center where the S corporation files
its income tax return, a statement that meets the requirements of § 1.1361-1(m)(2)(ii).

   Section 1362(d)(2) provides that (A) in general, an election under § 1362(a) shall

be terminated whenever (at any time on or after the first day of the first taxable year for
which the corporation is an S corporation) such corporation ceases to be a small
business corporation and (B) any termination under § 1362(d)(2) shall be effective on
and after the date of cessation.

    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
PLR-125893-12 3

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 X's election as an S corporation terminated on Date 2 and that this termination was
inadvertent within the meaning of § 1362(f). We further conclude that, pursuant to the
provisions of § 1362(f), X will be treated as being an S corporation from Date 2 and
thereafter, provided that X is otherwise eligible to be an S corporation and provided that
the election was not otherwise terminated under § 1362(d). Trust will be treated as an
ESBT from Date 2 and thereafter.

   This ruling is conditioned upon the trustee of Trust filing with the appropriate

service center an ESBT election effective Date 2. The ESBT election must be filed
within 120 days following the date of this letter and a copy of this letter should be
attached to the election.

  As an adjustment under § 1362(f)(4), a payment of $n and a copy of this letter

must be sent to the following address: Internal Revenue Service, Cincinnati Service
Center, 201 West Rivercenter Blvd., Covington, KY 41001, Stop 31, Terri Lackey,
Manual Deposit. This payment must be sent no later than Date 3.

    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. Specifically, we express no opinion regarding X’s eligibility to be an S corporation
or the validity of its S corporation election. We express no opinion on whether Trust
qualifies as an ESBT within the meaning of § 1361(e).

  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.

     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,



                                     Bradford Poston
                                     Senior Counsel, Branch 2
                                     Office of the Associate Chief Counsel
                                     (Passthroughs & Special Industries)