PLR 201328017: IRS grants relief after a missed QSST election

Plain-English summary

The IRS ruled that a corporation’s S corporation election was inadvertently invalid because a trust beneficiary did not timely make a qualified subchapter S trust election. The IRS allowed the corporation to be treated as an S corporation from the specified effective date, provided the beneficiary filed the QSST election within 120 days and the other conditions were met. Shareholders were required to make the related income, basis, and distribution adjustments. The ruling did not decide whether the corporation or trust otherwise qualified.

Ruling snapshot

• Question: Could the corporation receive relief under IRC § 1362(f) for the missed QSST election?
• Outcome: Approved, subject to filing the QSST election and making the required adjustments.
• Key authorities: IRC §§ 1361, 1362, 1366, 1367, 1368.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201328017
Third Party Communication: None
Release Date: 7/12/2013
Date of Communication: Not Applicable
Index Number: 1362.04-00, 1362.02-03
Person To Contact:
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Telephone Number:
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---------------------------------------------------- Refer Reply To:
CC:PSI:B01
PLR-132967-12
Date:
January 25, 2013

LEGEND

X = ----------------------------
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B = -------------------
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Trust = --------------------------------
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Date = ----------------------

Year = -------

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

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

This responds to a letter dated July 23, 2012, submitted on behalf of X by X’s authorized representative, requesting a ruling under § 1362(f) of the Internal Revenue Code.

FACTS

According to the information submitted and representations within, X was incorporated under the laws of State. Effective Date, X elected to be taxed as an S corporation.
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On Date, the shareholders of X included B and Trust. Trust was intended to be a qualified subchapter S trust (QSST), however, B, the beneficiary of Trust, did not file a timely election to treat Trust as a QSST, therefore resulting in X’s S corporation election being invalid. X represents that the failure to make a QSST election was discovered by X’s tax advisor in Year.

X represents that Trust qualified as a QSST under § 1361(d) as of Date and at all times since Trust acquired the X stock on Date. X further represents that the circumstances resulting in the failure to file a QSST election for Trust was inadvertent and was not motivated by tax avoidance or retroactive tax planning. 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. X also represents that other than the inadvertent invalid election due to an ineligible shareholder, X has qualified as a small business corporation at all times since its election on Date.

LAW AND ANALYSIS

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) 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) as owned by an individual who is a citizen or resident of the United States may be a shareholder.

Section 1361(d)(1) provides that a QSST whose beneficiary makes an election under
§ 1362(d)(2) will be treated as a trust described in § 1361(c)(2)(A)(i), and the QSST’s beneficiary will be treated as the owner (for purposes of § 678(a)) of that portion of the QSST’s S corporation stock to which the election under § 1361(d)(2) applies. Under
§ 1361(d)(2)(A), a beneficiary of a QSST may elect to have § 1361(d) apply. Under
§ 1361(d)(2)(D), this election will be effective up to 15 days and two months before the date of the election.

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
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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.

CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that X’s S corporation election was ineffective on Date because of the failure of B to make a timely QSST election. We further conclude that the ineffectiveness of X’s S corporation election constituted an inadvertent invalid election within the meaning of § 1362(f). Therefore, pursuant to the provisions of § 1362(f), X will be treated as an S corporation effective Date and thereafter, provided B files a QSST election for Trust with an effective date of Date with the appropriate service center within 120 days from the date of this letter, and X’s S corporation election was otherwise valid and not otherwise terminated under § 1362(d). A copy of this letter must be attached to the QSST election.

Accordingly, X’s shareholders, in determining their respective income tax liabilities, must include their pro rata share of the separately and non-separately computed items of X as provided in § 1366, make any adjustments to stock basis as provided in § 1367, and take into account distributions made by X as of provided by § 1368.

Except as specifically ruled upon above, we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the Code. Specifically, we express or imply no opinion regarding X’s eligibility to be an S corporation or whether Trust was otherwise a valid QSST.

This ruling is directed only to the taxpayer who requested it. According to § 6110(k)(3), this ruling may not be used or cited as precedent.
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Pursuant to the power of attorney on file with this office, we are sending a copy of this letter to your authorized representative.

Sincerely,

Faith Colson
Faith Colson
Senior Counsel, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

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

cc: