PLR 1341019: IRS restores S corporation status after late trust elections

Plain-English summary

The IRS concluded that an S corporation's termination was inadvertent after an ESBT election and two QSST elections were not timely filed. The corporation and its shareholders had reported consistently with a valid S election and agreed to make required adjustments. The IRS treated the corporation as an S corporation from the termination date, conditioned on filing the ESBT and QSST elections within 120 days. The ruling did not address whether the corporation otherwise qualified as an S corporation.

Ruling snapshot

• Question: Could the corporation receive relief after late ESBT and QSST elections caused its S corporation status to terminate?
• Outcome: Approved
• Key authorities: IRC §§ 1361(d), 1361(e), 1362(d)(2), 1362(f), and 6110(k)(3); Treas. Reg. §§ 1.1361-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201341019 Third Party Communication: None
Release Date: 10/11/2013 Date of Communication: Not Applicable
Index Number: 1362.01-03, 9100.00-00
Person To Contact:
--------------------------------------- ----------------, ID No. ------------------
------------------------------------------ Telephone Number:
---------------------------------- ----------------------
----------------------------------- Refer Reply To:
CC:PSI:B01
PLR-105132-13
Date:
June 27, 2013

LEGEND

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

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

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

Trust 1 = -------------------------------
-------------------------

Trust 2 = ------------------------------------
--------------------------

Trust 3 = ------------------------------------------------------
--------------------------

Trust 4 = --------------------------------------------------------------
---------------------------

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

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

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

Years = ---------------------------------------
PLR-105132-13 2

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

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

This responds to a letter dated January 27, 2013, and subsequent correspondence,
submitted on behalf of X, requesting relief under section 1362(f) of the Internal Revenue
Code (the Code).

FACTS

According to the information submitted and representations within, X was incorporated
and elected to be treated as an S corporation effective Date 1, under the laws of State.
On Date 2, an election was not timely filed to qualify Trust 1 as an Electing Small
Business Trust (ESBT) thereby causing Trust 1 to become an ineligible shareholder of
X. As a result, X’s S corporation status inadvertently terminated effective Date 2.

On Date 3, Trust 1 transferred all of its X stock in equal shares to A, Trust 3, and Trust

4. Also, on Date 3, Trust 2 acquired stock in X. X represents that A, and Trust 4 are
   eligible S corporation shareholders. X represents that B, as the successor trustee of
   Trust 1, will make an ESBT election for Trust 1 effective Date 2. X further represents
   that Trust 2 and Trust 3 were intended to be Qualified Subchapter S Trusts (QSST)
   effective Date 3, however, a timely QSST election was not filed. X represents that Trust
   2 and Trust 3 will make Qualified Subchapter S Trust (QSST) elections within 120 days
   of the date of this ruling letter.

X represents that the circumstances resulting in the termination of X’s S corporation
election was inadvertent and was not motivated by tax avoidance or retroactive tax
planning. X further represents that X and its shareholders have filed their income tax
returns consistent with having a valid S election in effect for all taxable years since X
elected to be an S corporation.

In addition, X represents that Trust 1 has at all times met the requirements of an ESBT
within the meaning of § 1361(d)(3) and that Trust 1 has filed its income tax return
consistent with being an ESBT for Years. X represents that Trust 2 and Trust 3 have
qualified as a QSST under § 1361(d) at all times since Trust 2 and Trust 3 acquired X
stock on Date 3.

X represents that other than the failure to make a valid ESBT election on Date 2, and
valid QSST elections on Date 3, X has qualified as a small business corporation at all
times since its election on Date 1. Lastly, X and its shareholders agree to make any
adjustments required as a condition of obtaining relief under the inadvertent termination
rule as provided under § 1362(f) that may be required by the Secretary.
PLR-105132-13 3

LAW AND ANALYSIS

Section 1361(a) provides that an S corporation is a small business corporation for which
an election under § 1362(a) is in effect.

Section 1361(b)(1) provides that the terms “small business corporation” means 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 1362(d)(2)(A) provides that an election under § 1362(a) shall 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 1361(c)(2)(A)(i) of the Code provides that for purposes of section 1361(b)(1) a
trust all of which is treated (under subpart E of part I of subchapter J of this chapter) as
owned by an individual who is a citizen or resident of the United States may be an S
corporation shareholder.

Section 1361(d)(1) of the Code provides that in the case of a qualified subchapter S
trust with respect to which a beneficiary makes an election under paragraph 1361(d)(2)
such trust shall be treated as a trust described in subsection 1361(c)(2)(A)(i) and for
purposes of section 678(a), the beneficiary of such trust shall be treated as the owner of
that portion of the trust which consists of stock in an S corporation with respect to which
the election under paragraph 1362(d)(2) is made.

Section 1361(d)(3) of the Code defines the term “qualified subchapter S trust” as a trust
all of the income (within the meaning of section 643(b)) of which is distributed (or
required to be distributed) currently to one individual who is a citizen or resident of the
United States. In addition, the terms of the trust must require that (i) during the lifetime
of the current income beneficiary, there shall be only one income beneficiary of the
trust, (ii) any corpus distributed during the life of the current income beneficiary may be
distributed only to such beneficiary, (iii) the income interest of the current income
beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the
termination of the trust, and (iv) upon the termination of the trust during the life of the
current income beneficiary, the trust shall distribute all of its assets to such beneficiary.

Section 1361(c)(2)(A)(v) provides that for purposes of § 1361(b)(1)(B), an ESBT is a
permissible shareholder.
PLR-105132-13 4

Section 1361(e)(3) provides that an election under § 1361(e) shall be made by the
trustee. Any such election shall apply to the taxable year of the trust for which made and
all subsequent taxable years of such trust unless revoked with the consent of the
Secretary.

Section 1.1361-1(m)(2)(i) 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 1.1361-1(m)(2)(iii) provides that the trustee of an ESBT must file the ESBT
election within the time requirements prescribed in § 1.1361-1(j)(6)(iii) for filing a QSST
election (generally within the 16-day-and-2-month period beginning on the day that the
stock is transferred to the trust).

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
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
the termination of X’s S election was inadvertent within the meaning of § 1362(f).
Therefore, X will be treated as an S corporation effective Date 2 and thereafter,
provided X’s S corporation election is not otherwise terminated under § 1362(d).

This relief is contingent upon B, the trustee of Trust 1, filing an ESBT election under
section 1361(e)(3) for Trust 1 effective Date 2 and upon the beneficiary of Trust 2 and
Trust 3 each filing a QSST election under section 1361(d)(2)(A) for their respective trust
with an effective date of Date 3. These elections should be made with the appropriate
service center within 120 days from the date of this letter. A copy of this letter should be
attached to the election.
PLR-105132-13 5

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 or implied concerning whether X
otherwise qualifies as an S corporation for federal tax purposes.

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.

                                  Sincerely,


                                  David R. Haglund
                                  David R. Haglund
                                  Branch Chief, 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