PLR 1308022: IRS restores an S election after untimely ESBT elections

Plain-English summary

The IRS ruled that an S corporation's election terminated when four trusts received its shares and the trustees failed to file the required electing small business trust elections. The IRS also found that the termination was inadvertent under section 1362(f). The corporation could continue to be treated as an S corporation if the trusts filed their ESBT elections retroactively within 120 days and the corporation and shareholders filed any required returns or adjustments. The ruling was conditioned on the corporation and trusts otherwise satisfying the relevant requirements.

Ruling snapshot

• Question: Could the corporation receive relief after its S election terminated because ESBT elections were not timely filed?
• Outcome: Approved
• Key authorities: IRC §§ 1361, 1361(e), 1362, 1362(f), and 6110(k)(3); Treas. Reg. § 1.1361-1(m)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201308022 Third Party Communication: None
Release Date: 2/22/2013 Date of Communication: Not Applicable
Person To Contact:
Index Number: 1362.04-00 ---------------------------, ID No. --------------
Telephone Number:
----------------------
---------------------------------- Refer Reply To:
---------------------------------------- CC:PSI:01
----------------------------- PLR-139478-12
-------------- Date:
--------------------------- November 02, 2012

Legend

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

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

Date 1 = -------

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

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

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

Trust A = ---------------------------------------------------------------

Trust B = -------------------------------------

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

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

Trust 3 = ------------------------------------
 2

Trust 4 = ----------------------------------------
------------------------

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

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

  This letter responds to your letter, submitted on behalf of X by X’s representative

dated September 11, 2012, requesting relief under section 1362(f) of the Internal
Revenue Code.

                                                  Facts

   According to the information submitted, X was established under the law of State

on Date 1. X elected to be an S corporation for federal tax purposes effective Date 2.
On Date 3, A transferred shares of X to Trust A and Trust B. Both trusts were eligible S
corporation shareholders. On Date 4, Trust A terminated and distributed the shares of
X to Trust 1, Trust 2, Trust 3 and Trust 4, with the intent that ESBT elections be filed to
for each trust. However, the trustees of Trust 1, Trust 2, Trust 3 and Trust 4 failed to
make the ESBT elections.
X represents that Trust 1, Trust 2, Trust 3 and Trust 4 are eligible to be ESBTs
as of Date 4. X represents that the failure to file the ESBT elections resulting in the
termination of X’s election to be an S corporation was inadvertent and was not
motivated by tax avoidance or retroactive tax planning. X and its shareholders agree to
make any adjustments and amended returns required by the Secretary consistent with
the treatment of X as an S corporation.

                                          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)(B) provides that for purposes of subchapter S, a “small

business corporation” cannot have as a shareholder a person (other than an estate, a
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trust described in § 1361(c)(2) or an organization described in § 1361(c)(6)) who is not
an individual.

 Section 1361(c)(2)(A)(v) provides that, for purposes of § 1362(b)(1)(B), an ESBT

may be an S corporation shareholder.

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

provided in § 1362(e)(2)(B), the term “electing small business trust” means any trust if
(i) such trust does not have as a beneficiary any person other than (I) an individual, (II)
an estate, or (III) an organization described in paragraph (2), (3), (4) or (5) of § 170(c),
or (IV) an organization described in § 170(c)(1) which holds a contingent interest in such
trust and is not a potential current beneficiary, (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. Any such election shall apply to the taxable year of the trust for which made
and all subsequent taxable years of such trust unless revoked with the consent of the
Secretary.

   Section 1.1361-1(m)(2)(i) of the Income Tax Regulations 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 1.1361-1(m)(2)(iii) provides that the trustee of an ESBT must file the

ESBT election within the time requirements prescribed in § 1.1361-1(j)(6)(iii) for filing a
QSST election (generally within the 16-day-and-2-month period beginning on the day
that the stock is transferred to the trust).

   Section 1362(f) provides, in relevant part, that if (1) an election under § 1362(a)

by any corporation 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); (2) the Secretary determines that the circumstances resulting in such
ineffectiveness or termination were inadvertent; (3) no later than a reasonable period of
time after discovery of the circumstances resulting in such ineffectiveness or
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 such corporation at any time
during the period specified pursuant to § 1362(f), agrees to make the adjustments
(consistent with the treatment of such corporation as an S corporation) as may be
required by the Secretary with respect to such period, then, notwithstanding the
circumstances resulting in such ineffectiveness or termination, such corporation shall be
treated as an S corporation during the period specified by the Secretary.
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                                     Conclusion

   Based solely on the facts submitted and the representations made, we conclude

that X’s S election terminated on Date 4 because of the failure to timely file ESBT
elections for Trust 1, Trust 2, Trust 3 and Trust 4. We further conclude that the
termination of X’s S election was inadvertent within the meaning of § 1362(f). Therefore,
X will be treated as an S corporation effective Date 4 and thereafter, provided X’s S
corporation election is otherwise valid and not otherwise terminated under § 1362(d).

    This ruling is contingent upon the filing of elections, within 120 days of the date of

this letter, to treat Trust 1, Trust 2, Trust 3 and Trust 4 as ESBTs, effective Date 4, with
the appropriate service center. A copy of this letter should be attached to each ESBT
election. X and its shareholders must also file any necessary original or amended
returns consistent with the relief granted within 120 days of the date of this letter.

   Except as specifically set forth above, no opinion is expressed or implied

concerning the federal tax consequences of the above-described facts under any other
provision of the Code, including whether X was otherwise a valid S corporation or
whether Trust 1, Trust 2, Trust 3 and Trust 4 are otherwise valid ESBTs.

  This ruling is directed only to the taxpayer(s) 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 taxpayer representative.

                                   Sincerely,


                                   David R. Haglund
                                   David R. Haglund
                                   Branch Chief, Branch 1
                                   (Passthroughs & Special Industries)

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

cc: