PLR 1322016: IRS restores S corporation status after missed QSST elections

Plain-English summary

The IRS ruled that a corporation's S corporation election terminated when beneficiaries of four trusts failed to make timely qualified subchapter S trust elections. The IRS found that the termination was inadvertent because the corporation and its shareholders had filed returns consistently with S corporation treatment and agreed to make any required adjustments. The corporation could continue to be treated as an S corporation from the termination date if the beneficiaries filed the required trust elections within 120 days. The IRS did not rule on whether the trusts otherwise qualified as QSSTs or whether the corporation otherwise qualified as an S corporation.

Ruling snapshot

• Question: Could the corporation retain S corporation treatment after the trusts' missed QSST elections caused an inadvertent termination?
• Outcome: Approved
• Key authorities: IRC §§ 1361 and 1362; 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: 201322016 Third Party Communication: None
Release Date: 5/31/2013 Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.03-02,
1362.00-00, 1362.04-00 Person To Contact:
---------------------, ID No. -----------------
----------------------------- Telephone Number:
----------------------------- ---------------------
----------------------- Refer Reply To:
------------------------ CC:PSI:B03
PLR-134713-12
Date:
February 07, 2013

                                               LEGEND

Company = --------------------------------------------------------------------------------------------------------------------

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

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

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

State = --------

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

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

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

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

  This letter responds to a letter dated July 17, 2012, and subsequent

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

                                                FACTS

PLR-134713-12 2

    Company was incorporated under State law on Date 1. Company elected to be

an S corporation as of Date 2. On Date 3, Trust 1, Trust 2, Trust 3, and Trust 4
(collectively the “Trusts”) received shares of Company. The beneficiaries of the Trusts
failed to make timely elections for the Trusts to be treated as Qualified Subchapter S
Trusts (QSSTs). As a result, Company’s S corporation election terminated as of Date 3.

   Company represents that the termination was inadvertent and not motivated by

tax avoidance or retroactive tax planning. For all relevant taxable years, Company and
Company’s shareholders filed their Federal income tax returns consistent with Company
qualifying as an S corporation, and the Trusts have filed consistent with the Trusts
having valid QSST elections in effect as of Date 3. In addition, Company and
Company’s shareholders agree to make any adjustments consistent with the treatment of
Company as an S corporation as may be required by the Secretary with respect to the
period specified by § 1362(f).

                               LAW AND ANALYSIS

    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) defines a “small business corporation” as a domestic

corporation which is not an ineligible corporation and which does not (A) have more
than 100 shareholders, (B) 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, (C) have a nonresident alien as a shareholder, and (D) have more than 1
class of stock.

   Section 1361(c)(2)(A)(i) provides that, for purposes of § 1361(b)(1)(B), a trust all

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

  Section 1361(d)(1) provides, in pertinent part, that in the case of a QSST with

respect to which a beneficiary makes an election under § 1361(d)(2): (A) the trust is
treated as a trust described in § 1361(c)(2)(A)(i) and (B) for purposes of § 678(a), the
beneficiary of the trust is 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 1361(d)(2)(A) provides that a beneficiary of a QSST (or his legal

representative) may elect to have § 1361(d) apply.
PLR-134713-12 3

    Section 1.1361-1(j)(6)(ii) of the Income Tax Regulations provides that the current

income beneficiary of the trust must make the election under § 1361(d)(2) by 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 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 1362(d)(2)(A) provides that 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.

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

any corporation was terminated under § 1362(d)(2) or (3), (2) the Secretary determines
that the circumstances resulting in such termination were inadvertent, (3) no later than a
reasonable period of time after discovery of the circumstances resulting in such
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 such 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 termination, such corporation shall be treated as an S
corporation during the period specified by the Secretary.

                                  CONCLUSION

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

Company’s S corporation election terminated on Date 3 because the beneficiaries of the
Trusts failed to make elections under § 1361(d)(2)(A) for the Trusts. We also conclude
that the termination of Company’s S corporation election was inadvertent within the
meaning of § 1362(f).

   Accordingly, under § 1362(f), Company will be treated as continuing to be an S

corporation from Date 3 and thereafter, provided that Company’s S corporation election
was valid and was not otherwise terminated under § 1362(d), and provided that the
beneficiaries of the Trusts file an election under § 1361(d)(2)(A) for their respective trust
with an effective date of Date 3 with the appropriate service center within 120 days from
the date of this letter. A copy of this letter should be attached to the elections under
§ 1361(d)(2)(A).
PLR-134713-12 4

   Except as expressly provided herein, we express or imply no opinion concerning

the Federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, we express or imply no opinion concerning
whether the Trusts are otherwise eligible to be QSSTs or whether Company is otherwise
eligible to be an S corporation for Federal tax purposes.

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter to Company’s authorized representatives.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the

Code provides that it may not be used or cited as precedent.

   The ruling contained in this letter is based upon information and representations

submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the ruling request, it is subject to verification on examination.

                                  Sincerely,


                                  /s/

                                  Stacy L. Short
                                  Senior Technician Reviewer, Branch 3
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

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

cc: