Missing consents and QSST election receive inadvertent S election relief

Plain-English summary

A corporation's Form 2553 omitted required consents from an individual shareholder and a trust beneficiary and misstated the number of shares each shareholder owned. The trust beneficiary also failed to make a timely qualified subchapter S trust election. Those defects made the corporation's S election ineffective. The corporation and its shareholders represented that the failures were not tax-motivated and that they had consistently treated the corporation as an S corporation and the trust as a QSST. The IRS granted inadvertent invalid-election relief under section 1362(f). Within 120 days, every shareholder had to file a consent effective on the original election date, and the trust beneficiary had to file a QSST election effective on that date.

Ruling snapshot

• Question: Can the corporation retain S status despite missing shareholder consents, incorrect stock information, and a missing QSST election?
• Outcome: Approved
• Key authorities: IRC §§ 678(a), 1361(d), 1362(a), 1362(f); Treas. Reg. §§ 1.1361-1(j)(6), 1.1362-6(b)(1)

Full text (IRS public release)

Internal Revenue Service                               Department of the Treasury
                                                       Washington, DC 20224

Number: 201528017                                      Third Party Communication: None
Release Date: 7/10/2015                                Date of Communication: Not Applicable
Index Numbers:1362.01-00, 1362.01-01,
              1362.04-00                               Person To Contact:
                                                       ---------------------, ID No. ----------------
------------------------------                         Telephone Number:
-------------------------------------------            ------------------
------------------------                               Refer Reply To:
 -------------------------------------                 CC:PSI:B3
                                                       PLR-136332-14
                                                       Date:
                                                       November 24, 2014




                                               Legend

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

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

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

State      = ------

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

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

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

       This letter responds to a letter dated September 25, 2014, and subsequent
correspondence, submitted on behalf of X by its authorized representatives, requesting
a ruling under § 1362(f) of the Internal Revenue Code (Code).

                                               Facts

         The information submitted states that X was incorporated under the laws of State
on Date 1. X elected to be an S corporation effective Date 2. However, the required
consent to X’s S corporation election was not obtained from shareholder A. In addition,
it is represented that Trust meets the definition of a “qualified subchapter S trust”
PLR-136332-14                                 2

(QSST) under § 1361(d)(3). However, no election was made to treat Trust as a QSST
effective Date 2. Furthermore, the required consent to X’s S corporation election was
not obtained from the beneficiary of Trust. In addition, Form 2553, Election by a Small
Business Corporation, filed by X included the incorrect number of shares owned by
each shareholder. Accordingly, X’s S corporation election was ineffective.

        X represents that there was no tax avoidance or retroactive tax planning involved
in the failure of A or the beneficiary of Trust to properly execute X’s Form 2553, in the
failure of the Form 2553 to contain to correct number of shares owned by each
shareholder, and in the failure of Trust to timely file a QSST election. It is represented
that X and its shareholders have treated X as an S corporation and Trust as a QSST
since Date 2. In addition, X and its shareholders agree to make any adjustments
consistent with the treatment of X as an S corporation as may be required by the
Secretary.

                                     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 the term “small business corporation” means
a domestic corporation that is not an ineligible corporation and that does not, among
other requirements, 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)(i) provides that, for the purposes of § 1362(b)(1)(B), a trust
all of which is treated (under subpart E of part I of subchapter J of Chapter 1) 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) provides that in the case of a QSST with respect to which a
beneficiary makes an election under § 1361(d)(2), the trust is 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 § 1361(d)(2) is made. Section
1361(d)(2)(A) provides that a beneficiary of a QSST may elect to have § 1361(d)(1)
apply.

        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 with which the corporation files its income tax return
the applicable form or statement including the information listed in § 1.1361-1(j)(6)(ii).
PLR-136332-14                                3

      Section 1362(d)(2)(A) provides that a beneficiary of QSST (or his legal
representative) may election to have § 1362(d) apply.

      Section 1362(a)(1) 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 1362(d)(2)(A) provides that an election under § 1362(a) is 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(d)(2)(B) provides that any termination under § 1362(d)(2)(A)
is effective on and after the date of cessation.

        Section 1362(f) provides that if (1) an election under § 1362(a) or
§ 1361(b)(3)(B)(ii) by any corporation (i) 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 (ii) was terminated
under § 1362(d)(2) or (3) or § 1361(b)(3)(C); (2) the Secretary determines that the
circumstances resulting in such ineffectiveness or termination were inadvertent; (3) no
later than a reasonable period of time after discovery of the circumstances resulting in
such ineffectiveness or termination, steps were taken so that the corporation for which
the election was made or the termination occurred is a small business corporation or a
QSub, as the case may be, or to acquire the required shareholder consents; and (4) the
corporation for which the election was made or the termination occurred, and each
person who was a shareholder of the corporation at any time during the period specified
pursuant to § 1362(f), agree to make the adjustments (consistent with the treatment of
the corporation as an S corporation or a QSub, as the case may be) as may be required
by the Secretary with respect to this period, then, notwithstanding the circumstances
resulting in such ineffectiveness or termination, the corporation shall be treated as an S
corporation or a QSub, as the case may be, 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 was ineffective on Date 2 as a result of the missing consents
to X’s S corporation election, the incorrect information concerning stock ownership, and
the failure of the beneficiary of Trust to make a QSST election under § 1361(d)(2) for
Trust. We further conclude that the ineffectiveness of X’s S corporation election
constituted an inadvertent invalid election within the meaning of § 1362(f).
Consequently, under § 1362(f), X will be treated as an S corporation from Date 2 and
thereafter provided that X’s S corporation election was otherwise valid and not
otherwise terminated under § 1362(d).

       As a condition of the rulings, each shareholder of X, including A and the
beneficiary of Trust, must each sign a written statement as described in § 1.1362-
PLR-136332-14                                 4

6(b)(1) consenting to X’s S corporation election effective Date 2. The written
statements must be filed with the appropriate service center within 120 days from the
date of this letter, indicating that the statements are to be associated with X’s originally
filed Form 2553. In addition, this ruling is contingent on the beneficiary of Trust filing an
election under § 1361(d)(2)(A) for Trust with an effective date of Date 2 with the
appropriate service center within 120 days from the date of this letter. A copy of this
letter should be attached to the election under § 1361(d)(2)(A) and to the consent
statements.

        Except as specifically ruled above, we express or imply no opinion concerning
the federal tax consequences of the facts described above under any other provision of
the Code, including whether X was otherwise a valid S corporation or whether Trust is
eligible to elect to be treated as a QSST.

       This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)
of the Code provides that it may not be used or cited for precedent.

       Pursuant to a power of attorney on file, we are sending a copy of this letter to X’s
authorized representatives.

      The rulings contained in this letter are 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 rulings requested, it is subject to verification on
examination.


                                       Sincerely,



                                       Bradford R. Poston
                                       Senior Counsel, Branch 3
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)




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

cc: