PLR 1341003: IRS restores S corporation status after missed trust elections

Plain-English summary

The IRS ruled that a corporation's S corporation election terminated after a trust shareholder missed a QSST election and another trust shareholder missed an ESBT election. The IRS determined that the termination was inadvertent and allowed the corporation to be treated as an S corporation from the original effective date, provided the election was not otherwise defective. The relief was conditioned on the QSST beneficiary and the ESBT trustee filing their respective elections with effective dates tied to the relevant stock transfers, within 120 days of the ruling. The ruling is limited to the taxpayer's facts and does not independently confirm the corporation's eligibility or the trusts' qualification.

Ruling snapshot

• Question: Could the corporation's S corporation status be restored after missed QSST and ESBT elections?
• Outcome: Approved
• Key authorities: IRC §§ 1361(d), 1361(e), 1362(f), and 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201341003 Third Party Communication: None
Release Date: 10/11/2013 Date of Communication: Not Applicable
Index Number: 1362.04-00, 1362.01-03,
1361.03-02, 1361.03-03 Person To Contact:
---------------------, ID No. ---------------
------------------------------- Telephone Number:
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----------------------------------- Refer Reply To:
---------------------------------- CC:PSI:02
PLR-100518-13
Date:
June 11, 2013

                                                LEGEND
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X =
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A =
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Trust 1 = ------------------------------------
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Trust 2 =
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Trust 3 =
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Date 1 = --------------------

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

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

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

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

   This letter responds to a letter dated November 5, 2012, submitted on behalf of X

by X’s authorized representative, requesting a ruling under § 1362(f) of the Internal
Revenue Code (the Code).
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     The information submitted states that after incorporating under the laws of State,

X elected to be an S corporation effective Date 1. A, X’s sole shareholder, transferred
all of the stock in X to Trust 1, a wholly owned grantor trust. On Date 2, Trust 1
transferred 50 percent of the stock in X to Trust 2. X represents that Trust 2 satisfied
the requirements of a Qualified Subchapter S Trust (“QSST”) within the meaning of
§ 1361(d)(3); however, the sole income beneficiary failed to make a timely QSST
election under § 1361(d)(2) causing X’s S election to terminate.

    On Date 3, A died and by operation of the governing instrument, Trust 1

transferred the remaining 50 percent of the stock in X to Trust 3. X represents that
Trust 3 qualifies as an Electing Small Business Trust (“ESBT”) within the meaning of
§ 1361(e)(1); however the trustee failed to make a timely ESBT election. The trustee’s
failure to make a timely ESBT election would have terminated X’s S corporation election
had it not already terminated.

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

corporation status were inadvertent and were not motivated by tax avoidance or
retroactive tax planning. X further represents that at all times X and its shareholders
reported income consistent with X’s treatment as an S corporation, Trust 2’s treatment
as a QSST, and Trust 3’s treatment as an ESBT. 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) 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.

    Section 1361(b)(1) provides in relevant part that “small business corporation”

means a domestic corporation which is not an ineligible corporation and which does not
have as a shareholder a person (other than an estate, a trust described in subsection
(c)(2), or an organization described in subsection (c)(6)) who is not an individual.

  Section 1361(d)(1)(A) provides that a QSST, within the meaning of § 1361(d)(3),

may be a shareholder for purposes of § 1361(b)(1)(B). Section 1361(c)(2)(A)(v)
provides that an ESBT, within the meaning of § 1361(e)(1), may be a shareholder for
purposes of § 1361(b)(1)(B).

  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) or was terminated under paragraph (2) or (3) of § 1362(d); (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, steps were taken so that the
corporation is a small business corporation; and (4) the corporation and each person
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who was a shareholder in 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 or termination, the corporation shall be treated as an S corporation
during the period specified by the Secretary.

    Based on the information submitted and representations made, we conclude that

the termination of X’s S corporation election was inadvertent within the meaning of
§ 1362(f). Based on the provisions of § 1362(f), X will be treated as an S corporation
from Date 1 and thereafter, provided that X’s S corporation election was not otherwise
ineffective or terminated under § 1362(d) for reasons not addressed in this letter. This
ruling is contingent upon the beneficiary of Trust 2 filing a QSST election effective
Date 2, and upon the trustee of Trust 3 filing an ESBT election effective Date 3. The
elections must be filed with the appropriate service center within 120 days of the date of
this ruling and should include a copy of this letter. A copy of this letter is provided for
that purpose.

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, no opinion is expressed regarding X’s eligibility to
be an S corporation or the validity of its S corporation election. Further, no opinion is
expressed as to whether Trust 1 qualifies as a grantor trust, whether Trust 2 qualifies as
a QSST, or whether Trust 3 qualifies as an ESBT.

  The rulings contained in this letter are 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 request for rulings, it is subject to verification on
examination.

   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. In accordance with the
Power of Attorney on file with this office, a copy of this letter is being sent to your
authorized representative.

                                    Sincerely,


                                    Charlotte Chyr
                                    Senior Technician Reviewer, Branch 2
                                    (Passthroughs & Special Industries)

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