PLR 1341009: IRS restores S corporation status after a late QSST election

Plain-English summary

The IRS ruled that a corporation's S corporation election terminated when a trust holding its stock did not timely elect qualified subchapter S trust status. The trust had been an eligible shareholder for a limited period after the stock was transferred under a will, but the beneficiary did not file the QSST election by the required date. The IRS found the termination inadvertent and treated the corporation as continuing to be an S corporation from the termination date. The relief required the beneficiary to file the QSST election with that effective date within 120 days after the ruling. The IRS did not rule on whether the trust otherwise meets the QSST requirements or whether the corporation otherwise qualifies as an S corporation.

Ruling snapshot

• Question: Can the corporation retain S corporation status after the trust shareholder failed to make a timely QSST election?
• Outcome: Approved
• Key authorities: IRC §§ 1361(a), 1361(b), 1361(c), 1361(d), 1362(f), and 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201341009 Third Party Communication: None
Release Date: 10/11/2013 Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.03-02
Person To Contact:
----------------------------------------------- ----------------, ID No. ------------------
------------------------------------------------------------ Telephone Number:
------- ----------------------
------------------------------------------------------ Refer Reply To:
---------------------------------- CC:PSI:B01
PLR-109299-13
Date:
June 25, 2013

LEGEND

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

A = --------------------------------------

B = -------------------------------

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

Date1 = ----------------------

Date2 = --------------------

Date3 = ----------------------

Date4 = ----------------------------

Year = -------

State = -----------
PLR-109299-13 2

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

This responds to a letter dated December 28, 2012, submitted on behalf of X by X’s
authorized representative, requesting relief under section 1362(f) of the Internal
Revenue Code.

FACTS

According to the information submitted, X was incorporated on Date1 under the laws of
State. Effective Date1, X elected to be taxed as an S corporation.

On Date2, A, a shareholder of X, died. Pursuant to A’s will, A’s X shares were
transferred to Trust on Date3. Trust was an eligible shareholder of X until Date4.

As of Date4, X represents that Trust was intended to be treated as 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 causing X’s S corporation election to
terminate as of Date4.

X represents that the circumstances resulting in the failure to file a QSST election for
Trust were inadvertent and were 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.

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 of an S corporation.

Section 1361(c)(2)(A)(iii) provides that a trust may be an S corporation shareholder with
respect to stock transferred to it pursuant to a will, but only for the 2-year period
beginning on the day on which such stock is transferred to it.
PLR-109299-13 3

Section 1361(d)(1) provides that in the case of a QSST with respect to which a
beneficiary makes an election under § 1361(d)(2) the trust is treated as a trust
described in § 1361(c)(2)(A)(i) and, 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 a S
corporation with respect to which the election under § 1361(d)(2) is made.

Section 1362(f) provides, in relevant part, that if (1) an election under § 1362(a) by any
corporation was terminated under § 1362(d)(2) or (3) or § 1361(b)(3)(C); (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 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 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 terminated on Date4 as a result of the failure to make a timely
QSST election for Trust. We further conclude that the termination of X’s S election on
Date4 was inadvertent within the meaning of § 1362(f). Pursuant to the provisions of §
1362(f), X will be treated as continuing to be an S corporation as of Date4 and
thereafter, provided that B files a QSST election for Trust with an effective date of Date4
with the appropriate service center within 120 days from the date of this letter, and X's S
corporation election is not otherwise terminated under § 1362(d). A copy of this letter
must be attached to the QSST election.

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. Further, no opinion is expressed or implied concerning whether Trust
meets the requirements of a QSST under § 1361(d)(3).

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.
PLR-109299-13 4

Pursuant to the power of attorney on file with this office, we are sending a copy of this
letter to your authorized representative.

                                  Sincerely,


                                  Joy C. Spies
                                  Joy C. Spies
                                  Senior Technician Reviewer, 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