S corporation termination relief granted after a missed QSST election

Plain-English summary

The IRS granted relief to an S corporation whose election terminated when a trust transferred its shares to another trust without a timely qualified subchapter S trust election. The corporation said the missed election was inadvertent and not motivated by tax avoidance or retroactive planning. The corporation and its shareholders agreed to make any required adjustments and to treat the corporation consistently as an S corporation. The IRS allowed the S corporation status to continue from the termination date, conditioned on the trustee filing the QSST election with that effective date within 120 days.

Ruling snapshot

• Question: Could the corporation receive relief under § 1362(f) after a trust's missed QSST election terminated its S corporation status?
• Outcome: Approved, conditioned on filing the QSST election within 120 days
• Key authorities: IRC §§ 1361, 1362, and 6110

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201405004 Third Party Communication: None
Release Date: 1/31/2014 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
--------------------------------------- ----------------------, ID No. ------------------
------------------------------------------------- Telephone Number:
-------------------------------- ----------------------
------------------------------------- Refer Reply To:
CC:PSI:B02
PLR-115353-13
Date: September 4, 2013

LEGEND

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

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

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

----------------------------------------------------

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

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

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

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

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

Date 4 = -----------------------------

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

   This responds to a letter dated March 25, 2013, and subsequent

correspondence, submitted on behalf of X, requesting a ruling under § 1362(f) of the
Internal Revenue Code.

PLR-115353-13 2

   The information submitted states that X was incorporated in State on Date 1 and

elected to be treated as an S corporation effective Date 2. Trust 1, a trust that was
treated under subpart E of part I of subchapter J of chapter 1 of the Code as entirely
owned by A, was a shareholder of X. A died on Date 3. On Date 4, pursuant to its
governing instrument, Trust 1 transferred its shares of X to Trust 2.

   Trust 1 qualified under § 1361(c)(2)(A)(i) as an eligible X shareholder prior to

Date 3. Trust 1 qualified under § 1361(c)(2)(A)(ii) as an eligible X shareholder from
Date 3 to Date 4. X represents that Trust 2 was eligible to be a qualified subchapter S
Trust (“QSST”) within the meaning of § 1361(d) effective Date 4. However, the trustee
of Trust 2 failed to properly file the QSST election. As a result, Trust 2 was not a
permissible shareholder, and X’s S corporation election terminated on Date 4.

   X represents that the failure to file the QSST election for Trust 2 and the resulting

termination of X’s S corporation election was not motivated by tax avoidance or
retroactive tax planning. X represents that after it discovered the possible terminating
event, X initiated corrective action. X and its shareholders have agreed to make any
adjustments that the Commissioner may require, consistent with the treatment of X as
an S corporation.

    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 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 the
ineffectiveness or termination were inadvertent, (3) no later than a reasonable period of
time after discovery of the circumstances resulting in the ineffectiveness or termination,
steps were taken (A) so that the corporation is a small business corporation or (B) to
acquire the 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 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 the ineffectiveness or
termination, the corporation will 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 the termination of X’s S corporation election on Date 4 was inadvertent within the
meaning of § 1362(f). Accordingly, pursuant to the provisions of § 1362(f), X will be
treated as continuing to be an S corporation from Date 4 and thereafter, provided X’s
S corporation election was valid and provided that the election was not otherwise
terminated under § 1361(d). This ruling is contingent on the trustee of Trust 2 filing a
QSST election with an effective date of Date 4 with the appropriate service center within
120 days of the date of this letter. A copy of this letter should be attached to the QSST

PLR-115353-13 3

election. If X or its shareholders fail to treat themselves as described above, this letter
ruling shall be null and void.

   Except as specifically ruled above, we express no opinion concerning the federal

tax consequences of the transactions described above under any other provisions of the
Code. Specifically, we express no opinion as to whether X is otherwise eligible to be
treated as an S corporation or Trust 2 is eligible to be treated as an QSST.

  This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

   Pursuant to a power of attorney on file, a copy of this letter is being sent to X’s

authorized representative.

                                   Sincerely,



                                   Melissa Liquerman
                                   Branch Chief, Branch 2
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

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