PLR 1338016: IRS treats an S corporation election as continuing after an inadvertent termination

Plain-English summary

An S corporation's shareholder died, and the estate distributed the shares to a trust. The trust was eligible to be a shareholder for a limited period, but no timely qualified subchapter S trust election was filed, causing the corporation's S election to terminate. The IRS found that the termination was inadvertent and that the corporation and its shareholders had continued filing consistently with S corporation treatment. It allowed the corporation to continue being treated as an S corporation if the trust filed the required QSST election within 120 days. The ruling did not decide the corporation's other eligibility or the trust's eligibility as a QSST.

Ruling snapshot

• Question: May the corporation receive relief from the inadvertent termination of its S corporation election?
• Outcome: Approved, S corporation treatment continued subject to a QSST election.
• Key authorities: IRC §§ 1361(c)(2)(A)(iii), 1361(d)(2), 1362(a), 1362(f), and 6110; Treas. Reg. § 1.1362-1(j)(6).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201338016 Third Party Communication: None
Release Date: 9/20/2013 Date of Communication: Not Applicable
Index Numbers:1362.04-00
Person To Contact:
------------------------- -----------------------, ID No. -------------------
--------------------------------------------- ---------------------------------------------------
---------------------- Telephone Number:
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Refer Reply To:
CC:PSI:B03
PLR-109591-13
Date:
May 02, 2013

                                               LEGEND

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

Y = -------------------------

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

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

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

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

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

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

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

  This letter responds to a letter dated February 20, 2013, and subsequent

correspondence, submitted on behalf of X by X’s authorized representatives, requesting
inadvertent termination relief pursuant to § 1362(f) of the Internal Revenue Code.

                                                FACTS

  The information submitted states that X was incorporated under the laws of State

and elected to be an S corporation effective on Date 1.
PLR-109591-13 2

  Y, one of X’s shareholders, died on Date 2. On Date 3, following the

administration of Y’s estate, Y’s estate distributed its shares in X to Trust. During the
two years between Date 3 and Date 4, Trust was an eligible shareholder by reason of
§ 1361(c)(2)(A)(iii).

    X represents that Trust was a qualified subchapter S trust (“QSST”) eligible to

make an election under § 1361(d)(2), effective Date 4. However, no such election was
filed on behalf of Trust. Therefore, Trust was not a permissible shareholder, and X’s S
corporation election terminated on Date 4.

   X represents that the termination was not motivated by tax avoidance or

retroactive tax planning. X further represents that from Date 4, 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 any adjustments that the Commissioner may
require, consistent with the treatment of X as an S corporation.

                              LAW AND ANALYSIS


   Section 1362(f) provides, in part, 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, (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 (A) 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
the case may be) 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 or a QSub, as the case may be during the period
specified by the Secretary.

                                  CONCLUSION

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

the termination of X’s S corporation election on Date 4 was inadvertent within the
meaning of § 1362(f). We further conclude that, pursuant to the provisions of § 1362(f),
X will be treated as an S corporation from Date 4 and thereafter, provided that, within
120 days of the date of this letter, Trust files a QSST election effective Date 4, pursuant
to the provisions set forth in § 1.1362-1(j)(6) with the appropriate service center. A copy
of this letter should be attached to the QSST election.
PLR-109591-13 3

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

the tax consequences of any aspect of any transaction or item discussed or referenced
in this letter. Specifically, we express or imply no opinion regarding whether X is
otherwise eligible to be treated as an S corporation or whether Trust is eligible to be
treated as a QSST.

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

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

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

copy of this letter to your authorized representatives.

   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,



                                  Richard T. Probst
                                  Senior Technician Reviewer, Branch 3
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

Enclosures (2):

  Copy of this letter
  Copy for § 6110 purposes

cc: