Late QSST election preserves S corporation status

Plain-English summary

An S corporation’s shares were transferred to a trust that was eligible to be a qualified subchapter S trust, but the beneficiary did not timely make the QSST election. The omission terminated the corporation’s S election, and the corporation later merged into a successor in an F reorganization. The IRS found the termination inadvertent and treated both corporations as continuing S corporations. Relief was conditioned on the beneficiary filing a QSST election effective on the original transfer date within 120 days.

Ruling snapshot

• Question: Can the corporations retain S status after the trust beneficiary failed to file a timely QSST election?
• Outcome: Approved as an inadvertent termination, conditioned on a QSST election within 120 days
• Key authorities: IRC §§ 1361(c) and (d), 1362(d) and (f), and 368(a)(1)(F)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201447007 Third Party Communication: None
Release Date: 11/21/2014 Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.03-02
Person To Contact:

----------------, ID No. ------------------

Telephone Number:

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

Refer Reply To:

CC:PSI:B01

PLR-103975-14
Date:
July 29, 2014

LEGEND

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

Y = ---------------------------------------------------------

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

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

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

D3 = ----------------------

D4 = ---------------------------

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

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

PLR-103975-14 2

This responds to a letter dated January 14, 2014, and subsequent information,
submitted on behalf of X by X’s authorized representative, requesting relief under
§ 1362(f) of the Internal Revenue Code (the Code).

FACTS

According to the information submitted, Y was incorporated on D1, under the laws of
State. Effective D2, Y elected to be taxed as an S corporation. X represents that, on
D4, Y merged with and into X in a qualified reorganization within the meaning of
§ 368(a)(1)(F). Following the reorganization, X continued as an S corporation.

On D3, Y shares were transferred to Trust. X represents that Trust is eligible to be a
qualified subchapter S trust (QSST). However, the beneficiary of Trust failed to timely
file a QSST election for Trust, thus causing Y’s S election to terminate effective D3.

X represents that the circumstances resulting in the termination of X’s S corporation
election were inadvertent. X further represents that X (and previously Y) and its
shareholders have filed their income tax returns consistent with having a valid S election
in effect since D2 and have treated Trust as a QSST since D3.

LAW AND ANALYSIS

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)(i) of the Code provides that for purposes of § 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 § 1361(d)(2), such
trust shall be treated as a trust described in § 1361(c)(2)(A)(i) and for purposes of
§ 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
§ 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 § 643(b)) of which is distributed (or required to

PLR-103975-14 3

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 1362(f) provides, in part, that if (1) an election under § 1362(a) by any
corporation was terminated under § 1362(d), (2) the Secretary determines that the
circumstances resulting in the termination were inadvertent, (3) no later than a
reasonable period of time after the 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 such corporation at any time
during the period of inadvertent termination of the S election, agrees to makes 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 termination, the corporation is treated as an S corporation
during the period specified by the Secretary.

CONCLUSION

Based solely on the facts submitted and representations made, we conclude Y’s S
election terminated on D3 when Trust became a shareholder and a QSST election was
not timely filed. We also conclude that the termination of Y’s S election was inadvertent
within the meaning of § 1362(f).

Accordingly, under § 1362(f), X (and Y) will be treated as continuing to be an S
corporation from D3 and thereafter, provided that X’s (and Y’s) S election is valid and
not otherwise terminated under § 1362(d).

This relief is contingent upon Trust’s beneficiary filing a QSST election for Trust
effective D3 within 120 days from the date of this letter. A copy of this letter should be
attached to the election.

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 the eligibility of X
or Y as an S corporation or Trust as a QSST.

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.

PLR-103975-14 4

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to the taxpayer’s authorized representative.

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