PLR 1315003: S corporation election reinstated after missed QSST elections

Plain-English summary

The IRS ruled on an S corporation whose shares had been transferred to five trusts. The trust beneficiaries had failed to make timely qualified subchapter S trust (QSST) elections, which caused the corporation's S election to terminate. The IRS determined that the termination was inadvertent and allowed the corporation to be treated as continuing to be an S corporation, provided the election was otherwise valid and had not been terminated for another reason. The trust beneficiaries had to file QSST elections effective as of the termination date within 120 days, and the corporation and its shareholders had to make the required tax adjustments.

Ruling snapshot

• Question: Could the corporation continue to be treated as an S corporation after its S election terminated because QSST elections were filed late?
• Outcome: Approved, subject to timely QSST elections and the required shareholder and corporation adjustments.
• Key authorities: IRC §§ 1361, 1362(d)(2), 1362(f), 1366, 1367, and 1368; Treas. Reg. § 1.1361-1(j)(6)(ii); IRC § 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201315003 Third Party Communication: None
Release Date: 4/12/2013 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
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---------------- Telephone Number:
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---------------------------------------- Refer Reply To:
CC:PSI:B02
PLR-129680-12
Date:
December 17, 2012

X = -----------------------------------------------------------------------------------------------------
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D1 = ----------------------

D2 = -----------------------

D3 = ----------------------

Trust1 = -----------------------------------------------------------------------------------------------------
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Trust2 = -----------------------------------------------------------------------------------------------------
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Trust3 = -----------------------------------------------------------------------------------------------------
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Trust4 = -----------------------------------------------------------------------------------------------------
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Trust5 = -----------------------------------------------------------------------------------------------------
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PLR-129680-12 2

Dear --------------------------

  This responds to a letter dated July 5, 2012, and subsequent correspondence

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

   The information submitted states that X was incorporated D1 and elected to be

an S corporation effective D2. On D3, shares of X were transferred to Trust1, Trust2,
Trust3, Trust4, and Trust5 (Trusts). X represents that Trusts have met the qualified
subchapter S trust (QSST) requirements under § 1361(d)(3) at all times since and
including D3. However, the beneficiaries of Trusts inadvertently failed to timely make
QSST elections. Therefore, X’s S election terminated on D3.

   X represents that the circumstances resulting in the termination of X’s S

corporation election were inadvertent and not motivated by tax avoidance. X further
represents that from D3, X and its shareholders have filed all returns consistent with X’s
status as an S corporation. 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 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 a "small business corporation" means a

domestic corporation that is not an ineligible corporation and that 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(c)(2)(A)(i) provides that for purposes of § 1361(b)(1)(B), a trust

may be a shareholder if all of it is treated (under subpart E of part I of subchapter J of
chapter 1) as owned by an individual who is a citizen or resident of the United States.

    Section 1361(c)(2)(B)(i) provides that for purposes of § 1361(b)(1), in the case of

a trust described in § 1361(c)(2)(A)(i), the deemed owner shall be treated as the
shareholder.

   Section 1361(d)(1) provides that in the case of a QSST with respect to which a

beneficiary makes an election under § 1361(d)(2), such trust shall be treated as a trust
described in § 1361(c)(2)(A)(i) and, for purposes of § 678(a), the beneficiary of such
trust shall be treated as the owner 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 1.1361-1(j)(6)(ii) of the Income Tax Regulations provides that the current

income beneficiary of the trust must make the QSST election under § 1361(d)(2) by
PLR-129680-12 3

signing and filing with the service center with which the corporation files its income tax
return the applicable form or statement including the information listed in § 1.1361-
1(j)(6)(ii).

    Section 1361(d)(3) provides that the term "qualified subchapter S trust" means a

trust- (A) the terms of which require that- (i) during the life of the current income
beneficiary, there shall be only 1 income beneficiary of the trust, (ii) any corpus
distributed during the life of the current income beneficiary may be distributed only to
such beneficiary, (iii) the income interest of the current income beneficiary in the trust
shall terminate on the earlier of such beneficiary's death or the termination of the trust,
and (iv) upon termination of the trust during the life of the current income beneficiary,
the trust shall distribute all of its assets to such beneficiary, and (B) all of the income
(within the meaning of § 643(b)) of which is distributed (or required to be distributed)
currently to 1 individual who is a citizen or resident of the United States.

   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(d)(2)(B) provides that the termination 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 it was 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 such
ineffectiveness were inadvertent, (3) no later than a reasonable period of time after
discovery of the event resulting in the ineffectiveness, steps were taken (A) so that the
corporation is a small business corporation, or (B) to acquire the required 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 such ineffectiveness, the corporation
shall 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 S corporation election terminated on D3, under § 1362(d)(2), because of the
failure of the Trust beneficiaries to make the QSST elections, and that this termination
of X’s S election was an inadvertent termination within the meaning of § 1362(f).
Accordingly, pursuant to the provisions of § 1362(f), X will be treated as continuing to be
an S corporation from D3 and thereafter, provided X’s S corporation election was valid
and was not otherwise terminated under § 1362(d). All of X’s shareholders in
determining their respective income tax liabilities must include their pro rata share of
separately stated items of income (including tax-exempt income), loss, deduction, or
PLR-129680-12 4

credit, and nonseparately stated items of income or loss of X 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.

   This ruling is contingent upon the Trust beneficiaries filing QSST elections for

Trusts with an effective date of D3, with the appropriate service center within 120 days
of the date of this ruling. A copy of this letter should be attached to each of the QSST
elections. If X or its shareholders fail to treat X as described above, this letter ruling will
be null and void.

   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, including whether X was a small business corporation under § 1361(b), or
whether Trusts are QSSTs within the meaning of § 1361(d)(3).

  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.

   Pursuant to a power of attorney on file with this office, a copy of this letter is

being sent to X's authorized representative.

                                    Sincerely,



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

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