PLR 201341006: IRS reinstates an S corporation election after missing ESBT elections

Plain-English summary

The IRS ruled that a corporation's S corporation election was ineffective because two trusts that owned its shares had not filed the required electing small business trust (ESBT) elections. The IRS determined that the failure was inadvertent under section 1362(f), so the corporation could be treated as an S corporation from the original effective date, assuming the election was otherwise valid and had not otherwise terminated. The relief was conditioned on the trustees filing ESBT elections retroactively within 120 days and on the corporation and its shareholders making any required adjustments. The ruling matters to S corporations whose trust shareholders meet the ESBT requirements but missed the required election filing.

Ruling snapshot

• Question: Could the corporation's S corporation status be restored after its trust shareholders failed to file ESBT elections?
• Outcome: Approved
• Key authorities: IRC §§ 1361, 1362(f), and 6110(k)(3); Treas. Reg. § 1.1361-1(m)(2)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201341006
Third Party Communication: None
Release Date: 10/11/2013
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-103203-13
Date:
July 01, 2013

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

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D2 =

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Trust1 = -

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Trust2 =

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

This responds to a letter dated December 31, 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 in State on D1 and elected to be an S corporation effective D2. On D2, Trust1 and Trust2 (Trusts) owned shares of X. X represents that Trusts have met the electing small business trust (ESBT) requirements under § 1361(d)(3) at all times since and including D2. However, no ESBT election was filed for the Trusts. Therefore, X’s S election was ineffective on D2.
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X represents that the failure to file ESBT elections was inadvertent and not motivated by tax avoidance. X further represents that from D2, 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) of the Internal Revenue 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)(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(e) defines an ESBT. Section 1361(e)(1)(A) provides that, except as provided in § 1361(e)(2)(B), an ESBT means any trust if (1) such trust does not have as a beneficiary any person other than (I) an individual, (II) an estate, (III) an organization described in § 170(c)(2), (3), (4) or (5), or (IV) an organization described in § 170(c)(1) which holds a contingent interest in such trust and is not a potential current beneficiary, (ii) no interest in such trust was acquired by purchase, and (iii) an election under § 1361(e) applies to such trust. Section 1361(e)(3) provides that an election under § 1361(e) shall be made by the trustee.

Section 1.1361-1(m)(2)(i) of the Income Tax Regulations provides that the trustee of an ESBT must make the ESBT election by signing and filing, with the service center where the S corporation files its income tax return, a statement that meets the requirements of § 1.1361-1(m)(2)(ii).

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
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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 was ineffective on D2 because of the failure of the Trusts’ trustees to make the ESBT elections, and that X’s ineffective S election was inadvertent within the meaning of § 1362(f). Accordingly, pursuant to the provisions of § 1362(f), X will be treated as being an S corporation from D2 and thereafter, provided that X’s S corporation election was otherwise valid and was not otherwise terminated under § 1362(d).

This ruling is contingent upon the trustees of the Trusts filing ESBT elections for the Trusts with an effective date of D2, 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 ESBT 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 ESBTs within the meaning of § 1361(e).

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,

Bradford Poston
Senior Counsel, Branch 2
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

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