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:
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----------------------, ID No. ------------------
------------------------------------------------- Telephone Number:
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Refer Reply To:
CC:PSI:B02
PLR-115353-13
Date: September 4, 2013

LEGEND

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

Trust 1 = -----------------------------------------------------------------------------------------
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Trust 2 = ---------------------------------------------------------------------------
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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.

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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

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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