S corporation receives relief for missing trust election

Plain-English summary

An S corporation shareholder died and the shareholder's estate transferred company stock to a trust under the will. After the trust's two-year period as an eligible shareholder expired, the trustee failed to make the election needed for electing small business trust status. That failure terminated the company's S corporation election. The IRS found the termination inadvertent and allowed the company to be treated as continuously maintaining S status. Relief required the trustee to file the ESBT election and consistent returns within 120 days.

Ruling snapshot

• Question: Was the S corporation termination caused by the missing ESBT election inadvertent?
• Outcome: Approved, conditioned on filing the election and returns within 120 days
• Key authorities: IRC §§ 1361 and 1362(f)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201503004 Third Party Communication: None
Release Date: 1/16/2015 Date of Communication: Not Applicable
Index Numbers: 1362.00-00, 1362.04-00
Person To Contact:
----------------------------------------- -----------------------, ID No. -------------------
------------------------------------------ ---------------------------------------------------
----------------------------- Telephone Number:
-------------------------- ----------------------
Refer Reply To:
CC:PSI:B03
PLR-118898-14
Date:
October 06, 2014

                                              LEGEND

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

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

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

State = ---------

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

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

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

Year = -------

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

   This letter responds to a letter dated April 23, 2014, and subsequent

correspondence, submitted on behalf of X by X’s authorized representative, requesting
a ruling under § 1362(f) of the Internal Revenue Code (Code).
PLR-118898-14 2

                                      FACTS

   X is a State corporation that elected to be an S corporation effective Date 1. In

Year, A, a shareholder of X, died. On Date 2, A’s estate transferred shares of X to Trust
pursuant to the terms of A’s will. Trust qualified under § 1361(c)(2)(A)(iii) as an eligible
S corporation shareholder for a two-year period beginning on the day X stock was
transferred to it. X represents that Trust qualified as an electing small business trust
(ESBT). However, the trustee of Trust failed to file an election to treat Trust as an
ESBT. As a result, X’s S corporation election terminated on Date 3, after the two-year
period described in § 1361(c)(2)(A)(iii) ended.

   X represents that the failure to file the ESBT election for Trust was inadvertent

and not motivated by tax avoidance. X and its shareholders have agreed to make any
adjustments consistent with the treatment of X as an S corporation as may be required
by the Secretary with respect to the period specified by § 1362(f).

                              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)(B) provides that, for purposes of subchapter S, the term

"small business corporation" means a domestic corporation which is not an ineligible
corporation and which does not 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.

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

with respect to stock transferred to it pursuant to the terms of a will may be a
shareholder, but only for the two-year period beginning on the day on which such stock
is transferred to it.

   Section 1361(c)(2)(A)(v) provides that for purposes of §1361(b)(1)(B), an ESBT

is a permissible shareholder.

   Section 1361(e)(1)(A) provides that, except as provided in § 1361(e)(1)(B), the

term “electing small business trust” 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)-(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.
PLR-118898-14 3

   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 1362(d)(2)(A) provides that an election under § 1362(a) shall 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 relevant 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 such adjustments
(consistent with the treatment of the corporation as an S corporation) as may be
required by the Secretary with respect to the period, then, notwithstanding the
circumstances resulting in the termination, the corporation will be treated as an S
corporation during the period specified by the Secretary.

                                  CONCLUSION

   Based solely on the facts submitted and representations made, we conclude that

X’s S corporation election terminated on Date 3 when the trustee of Trust failed to file
an ESBT election for Trust effective Date 3. We further conclude that the termination
was inadvertent within the meaning of § 1362(f). Pursuant to the provisions of
§ 1362(f), X will be treated as continuing to be an S corporation on and after Date 3,
unless X’s S corporation election is otherwise terminated under § 1362(d). Moreover,
Trust will be treated as an ESBT from Date 3, and thereafter, provided Trust files
income tax returns for this period consistent with the treatment of Trust as an ESBT.

    This ruling is contingent on the trustee of Trust filing an ESBT election effective

Date 3, with the appropriate service center. The ESBT election and any returns must
be filed within 120 days following the date of this letter, and a copy of this letter should
be attached to the election and returns. If these conditions are not met, this ruling is null
and void.

    Except as expressly provided herein, we express or imply no opinion concerning

the tax consequences of any aspect of any transaction or item discussed or referenced
in this letter. Specifically, we express or imply no opinion regarding whether X is
PLR-118898-14 4

otherwise eligible to be an S corporation or whether Trust is otherwise eligible to be an
ESBT.

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

the Code 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 your authorized representative.

   The ruling contained in this letter is based upon information and representations

submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the ruling request, it is subject to verification on examination.

                                  Sincerely,



                                  Mary Beth Carchia
                                  Senior Technician Reviewer, Branch 3
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

Enclosures (2):

  Copy of this letter
  Copy for § 6110 purposes