Missed QSST elections for two trusts receive relief

Plain-English summary

Two trusts acquired shares of an S corporation and otherwise met the qualified subchapter S trust requirements, but their income beneficiary failed to file QSST elections. The trusts therefore were impermissible shareholders and technically terminated the corporation's S election. The corporation represented that the failure was inadvertent, not tax-motivated, and that all parties consistently filed as though S status continued. The IRS granted inadvertent-termination relief and treated the corporation as continuously maintaining its S election. The beneficiary must file elections for both trusts effective on the original stock-transfer date within 120 days, with the ruling attached. The IRS did not otherwise determine the corporation's S eligibility or either trust's QSST eligibility.

Ruling snapshot

• Question: Can the corporation retain continuous S status after two shareholder trusts missed their QSST elections?
• Outcome: Approved
• Key authorities: IRC §§ 1361(d) and 1362(f); Treas. Reg. § 1.1361-1(j)(6)(ii)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201444009 Third Party Communication: None
Release Date: 10/31/2014 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
----------------------------- -------------------------, ID No. ------------
------------------------------------ Telephone Number:
------------------ ------------------
--------------------------------------- Refer Reply To:
CC:PSI:03
PLR-106523-14
Date:
July 18, 2014

LEGEND

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

D1 = ----------------

D2 = ---------------------

Trust1 = ----------------------------------------------------
----------------------

Trust2 = ----------------------------------------------------
----------------------------------------------------
----------------------

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

   This letter responds to a letter dated January 31, 2014, and subsequent

correspondence, submitted on behalf of X by its authorized representative requesting a
ruling under § 1362(f) of the Internal Revenue Code (“Code”).

                                               FACTS

    X was incorporated on D1 and elected to be an S corporation effective D1. On

D2, Trust1 and Trust2 became shareholders of X. X represents that Trust1 and Trust2
satisfy the qualified subchapter S trust (“QSST”) requirements under § 1361(d)(3).
However, the income beneficiary of Trust1 and Trust2 failed to file elections for Trust1
and Trust2 to be QSSTs effective D2. Therefore, Trust1 and Trust2 were not permitted
shareholders.

PLR-106523-14 2

   X represents that the termination was not motivated by tax avoidance or

retroactive tax planning. X further represents that X and its shareholders have filed
consistently with the treatment of X as an S corporation since D1. 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.

                              LAW AND ANALYSIS

  Section 1362(a) provides that, except as provided in § 1362(g), a small business

corporation may elect, in accordance with the provisions of § 1362, to be an S
corporation.

    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) provides that the term “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 one class of stock.

   Section 1361(c)(2)(A)(i) provides that for purposes of § 1361(b)(1)(B), a trust all

of which is treated (under subpart E of part 1 of subchapter J of Chapter 1) as owned by
an individual who is a citizen or resident of the United States may be a shareholder.

   Section 1361(d)(1) provides that a QSST whose beneficiary makes an election

under § 1361(d)(2) will be treated as a trust described in § 1361(c)(2)(A)(i), and the
beneficiary of such trust shall be treated as the owner (for purposes of § 678(a)) of that
portion of the trust which consists of stock in an S corporation with respect to which the
election under § 1361(d)(2) is made.

   Section 1361(d)(2)(A) provides that a beneficiary of a QSST (or his legal

representative) may elect to have § 1361(d) apply. Section 1361(d)(2)(D) provides that
an election under § 1361(d)(2) shall be effective up to 15 days and 2 months before the
date of the election.

    Section 1.1361-1(j)(6)(ii) of the Income Tax Regulations provides that the current

income beneficiary of the trust must make the election under § 1361(d)(2) by signing
and filing with the service center where the corporation files its income tax return the
applicable form or a statement including the information listed in § 1.1361-1(j)(6)(ii).

PLR-106523-14 3

   Section 1362(d)(2)(A) provides that an election under § 1362(a) will be

terminated whenever (at any time on or after the first day of the first taxable year for
which the corporation is an S corporation) such corporation ceases to be a small
business corporation.

    Section 1362(f) provides, in part, that if (1) an election under § 1362(a) by any

corporation was terminated under § 1362(d)(2) or (3); (2) the Secretary determines that
the circumstances resulting in the termination were inadvertent; (3) no later than a
reasonable period of time after discovery of the circumstances resulting in the
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 the corporation at any time during
the period specified pursuant to § 1362(f), agrees to make the 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 termination, the 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 corporation election terminated on D2, when stock in X was transferred to
Trust1 and Trust2. We further conclude that the termination 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 D2 and thereafter, provided that X’s S
corporation election was otherwise valid and has not otherwise terminated under
§ 1362(d).

   This ruling is conditioned on the beneficiary of Trust1 and Trust2 filing a QSST

election for Trust1 and Trust2, effective D2, 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
elections.

     Except as specifically ruled above, we express or imply no opinion concerning

the federal tax consequences of the facts described above under any other provisions
of the Code, including X’s eligibility to be a valid S corporation, or Trust1 or Trust2’s
eligibility to be a QSST.

PLR-106523-14 4

  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.

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter to X’s authorized representative.

                                     Sincerely,


                                     Holly Porter
                                     Branch Chief, Branch 3
                                     Office of the Associate Chief Counsel
                                     (Passthroughs and Special Industries)

Enclosures (2):

  Copy of this letter
  Copy for § 6110 purposes

cc: