PLR 201341019: 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:
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Refer Reply To:
CC:PSI:B01
PLR-105132-13
Date:
June 27, 2013

LEGEND

X = ---------------------------------
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A = -------------------
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B = ------------------------

Trust 1 = -------------------------------
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Trust 2 = ------------------------------------
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Trust 3 = ------------------------------------------------------
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Trust 4 = --------------------------------------------------------------
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Date 1 = --------------------

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

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

Years = ---------------------------------------
PLR-105132-13
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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.
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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.
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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.
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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