Missed QSST elections receive inadvertent S corporation termination relief

Plain-English summary

An S corporation transferred shares to three trusts whose income beneficiaries failed to make timely qualified subchapter S trust elections. Without those elections, the trusts were ineligible S corporation shareholders and the corporation's S election terminated. The corporation represented that the failures were inadvertent, were not motivated by tax avoidance or retroactive planning, and that all affected returns had been filed consistently with continued S status. The IRS granted inadvertent-termination relief under section 1362(f), allowing the corporation to remain an S corporation from the first transfer date forward. Relief required each trust beneficiary to file the appropriate QSST election, effective on that date, within 120 days.

Ruling snapshot

• Question: Can the corporation retain S status after three trust beneficiaries failed to file timely QSST elections?
• Outcome: Approved
• Key authorities: IRC §§ 678(a), 1361, 1362(d), 1362(f)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201528037                                             Third Party Communication: None
Release Date: 7/10/2015                                       Date of Communication: Not Applicable
Index Number: 1362.04-00, 1361.01-02
                                                              Person To Contact:
--------------------------------------------------------      ------------------------------ ------------
----------------------------------                            Telephone Number:
----------------                                              --------------------
 --------------------------                                   Refer Reply To:
                                                              CC:PSI:B01
                                                              PLR-146340-14
                                                              Date:
                                                              March 26, 2015




LEGEND:

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

Trust 1               =      -----------------------------------------------------------------------------------------------------

Trust 2               =      ----------------------------------------------------------------------------------------------------------
                             ----------------

Trust 3               =      ----------------------------------------------------------------------------------------------------------
                             ----------------

State                 =      ------

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

Date 2                =      ---------------------
                             ----------------------------------------------------------------------------------------------------------
Date 3                =      --------



Dear---------------

This responds to a letter dated December 19, 2014, submitted on behalf of X by its
authorized representatives, requesting a ruling under § 1362(f) of the Internal Revenue
Code.
PLR-146340-14                                 2

Facts

The information submitted states that X was incorporated under the laws of State.
Effective Date 1, X elected to be taxed as an S corporation. On Date 2, shares of X
stock were transferred to Trust 1, Trust 2 and Trust 3. Also, on Date 3, additional shares
of X were transferred to Trust 1, Trust 2 and Trust 3. X represents that Trust 1, Trust 2
and Trust 3 meet the requirements to be treated as qualified subchapter S trusts
(QSSTs) as described in § 1361(d) as of Date 2, except the respective income
beneficiaries of Trust 1, Trust 2 and Trust 3 failed to make the required election under
§ 1361(d)(2). Therefore, Trust 1, Trust 2 and Trust 3 were not eligible S corporation
shareholders and as a result, X’s S corporation election terminated on Date 2.
Furthermore, X’s S corporation election would have terminated on Date 3 (if it had not
already terminated on Date 2) due to the additional transfers of X stock to Trust 1, Trust
2 and Trust 3.

X represents that the circumstances resulting in the termination of X’s S corporation
election were inadvertent and were not motivated by tax avoidance or retroactive tax
planning. Additionally, X represents that X and its shareholders have filed their federal
income tax returns consistent with having a valid S corporation election in effect for X.
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 a “small business corporation” means a domestic
corporation that is not an ineligible corporation and that 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)(i) provides that, for the purposes of §1362(b)(1)(B), a trust all of
which is treated (under title 26, subtitle A, chapter 1, subchapter J, part I, subpart E of
the United States Code) as owned by an individual who is a citizen or resident of the
United States may be a shareholder of an S corporation.

Section 1361(d)(1) provides that, in the case of a qualified subchapter S trust with
respect to which a beneficiary makes an election under § 1361(d)(2), (A) such trust will
be treated as a trust described in § 1361(c)(2)(A)(i), and (B) for purposes of § 678(a),
the beneficiary of such trust shall be treated as the owner of that portion of the trust
PLR-146340-14                                3

which consists of stock in an S corporation with respect to which the election under
§ 1361(d)(2) is made.

Section 1362(f) provides 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 such 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 is a small business corporation;
and (4) the corporation, and each person who was a shareholder of the corporation at
any time during the period specified under § 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 for that period, then, notwithstanding the circumstances
resulting in such 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 representation made, we conclude X’s S
election terminated on Date 2 when the stock in X was transferred to Trust 1, Trust 2
and Trust 3 because the income beneficiaries of Trust 1, Trust 2 and Trust 3 failed to
timely file the required QSST elections under § 1361(d)(2). We further conclude that
the termination of X’s S corporation election was inadvertent within the meaning of
§ 1362(f). Moreover, had X’s S corporation not already terminated, it would have
terminated on Date 3 when the additional shares of X were transferred to Trust 1, Trust
2 and Trust 3. Similarly, this terminating event would have been an inadvertent
termination within the meaning of § 1362(f).

Accordingly, under § 1362(f), X will be treated as continuing to be an S corporation from
Date 2 and thereafter, provided that X’s S election is valid and not otherwise terminated
under § 1362(d).

This relief is contingent upon the income beneficiaries of Trust 1, Trust 2 and Trust 3
filing a QSST election for their respective trust effective Date 2 within 120 days from the
date of this letter. A copy of this letter should be attached to each QSST election.

Except as specifically ruled above, we express or imply no opinion concerning the
federal tax consequences of the transactions described above under any other
provision of the Code. Specifically, we express or imply no opinion regarding whether X
is otherwise eligible to be an S corporation or whether Trust 1, Trust 2 and Trust 3 are
eligible to be treated as QSSTs.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent. In accordance with the power of
PLR-146340-14                                   4

attorney on file with this office, a copy of this letter is being sent to X’s authorized
representatives.



                                        Sincerely,


                                        Laura C. Fields
                                        Laura C. Fields
                                        Senior Technician Reviewer, Branch 1
                                        (Passthroughs & Special Industries)



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



cc: