PLR 1346001: IRS restores S corporation status after late ESBT election

Plain-English summary

The IRS ruled that a corporation's S corporation election terminated when its shares were transferred to a trust whose trustee had not timely made an Electing Small Business Trust election. The trust otherwise met the requirements for ESBT status, and the corporation represented that the failure was inadvertent and that the corporation and its shareholders had consistently treated it as an S corporation. The IRS granted relief under IRC § 1362(f), treating the corporation as an S corporation from the termination date, provided its election was otherwise valid and the trustee filed the ESBT election within 120 days. The ruling applies only to the requesting taxpayer and does not decide the corporation's eligibility under other Code provisions.

Ruling snapshot

• Question: May the corporation retain S corporation status after its shareholder trust failed to make a timely ESBT election?
• Outcome: Approved, subject to filing the ESBT election within 120 days.
• Key authorities: IRC §§ 1361 and 1362(f); Treas. Reg. §§ 1.1361-1(j) and 1.1361-1(m); IRC § 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201346001 Third Party Communication: None
Release Date: 11/15/2013 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
-------------------------- ----------------, ID No. ------------------
-------------------------------------------------- Telephone Number:
------------------- ----------------------
----------------------------------- Refer Reply To:
CC:PSI:B01
PLR-111161-13
Date:
August 02, 2013

LEGEND

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

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

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

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

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

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

This responds to a letter dated February 27, 2013, and subsequent correspondence,
submitted on behalf of X by X’s authorized representative, 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
under the laws of State and elected to be treated as an S corporation on Date 1. On
Date 2, X shares were transferred to Trust, causing X’s S corporation election to
terminate. X represents that Trust has at all times met the requirements of an Electing
Small Business Trust (ESBT) except that the trustee of Trust did not make a timely
ESBT election under §1361(e)(3).

X represents that X and its shareholders have treated X as an S corporation at all
relevant times. X represents that the failure to file an ESBT election for Trust was
inadvertent and was not motivated by tax avoidance or retroactive tax planning.
Further, X represents that X and its shareholders agree to make any adjustments
(consistent with the treatment of X as an S corporation) that may be required by the
Secretary.

LAW AND ANALYSIS

Section 1361(a)(1) 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)(v) provides that, for purposes of § 1361(b)(1)(B), an ESBT may
be an S corporation shareholder.

Section 1361(e)(1)(A) provides that an ESBT means any trust if (i) 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)(1)(B) provides that an ESBT does not include (i) any qualified
subchapter S trust (as defined in § 1361(d)(3)) if an election under § 1361(d)(2) applies
to any corporation the stock of which is held by such trust, (ii) any trust exempt from tax
under subtitle A, and (iii) any charitable remainder annuity trust or charitable remainder
unitrust (as defined in § 664(d)).

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) 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 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
X’s S election terminated on Date 2 because of the failure to timely file an ESBT
election for Trust. We further 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
otherwise valid and not otherwise terminated under § 1362(d).

This ruling is contingent on the trustee of Trust filing with the appropriate service center,
within 120 days from the date of this letter, an election to treat Trust as an ESBT
effective Date 2. A copy of this letter should be attached to the ESBT 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.

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.

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

                                  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

cc: