Missing QSST elections caused inadvertent S termination

Plain-English summary

Four trusts acquired shares of an S corporation, but their beneficiaries failed to timely elect qualified subchapter S trust treatment. That made the trusts ineligible shareholders and terminated the corporation's S election. The corporation represented that the failure was inadvertent, not tax-motivated, and that all parties had filed consistently with continued S status and valid QSST elections. The IRS allowed the corporation to remain an S corporation, provided each beneficiary filed a retroactive QSST election within 120 days and all required adjustments were made. It did not decide whether the trusts or corporation otherwise qualified.

Ruling snapshot

• Question: Could the corporation retain S status after four trust beneficiaries missed their QSST election deadlines?
• Outcome: Approved as an inadvertent termination, conditioned on retroactive elections within 120 days
• Key authorities: IRC §§ 1361(d) and 1362(f)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201532015
Release Date: 8/7/2015

Third Party Communication: None
Date of Communication: Not Applicable

Index Number: 1362.04-00

Person To Contact:

Telephone Number:

Refer Reply To:
CC:PSI:B03
PLR-133916-14

Date:
March 02, 2015

LEGEND

Company =
Trust 1 =
Trust 2 =
Trust 3 =
Trust 4 =
State =
Date 1 =
Date 2 =
Date 3 =

Dear :

PLR-133916-14 2

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

FACTS

Company was incorporated under State law on Date 1. Company elected to be
an S corporation as of Date 2. On Date 3, Trust 1, Trust 2, Trust 3, and Trust 4
(collectively the “Trusts”) received shares of Company. The beneficiaries of the Trusts
failed to make timely elections for the Trusts to be treated as Qualified Subchapter S
Trusts (QSSTs). As a result, Company’s S corporation election terminated as of Date 3.

Company represents that the termination was inadvertent and not motivated by
tax avoidance or retroactive tax planning. For all relevant taxable years, Company and
Company’s shareholders filed their Federal income tax returns consistent with Company
qualifying as an S corporation, and the Trusts have filed consistent with the Trusts
having valid QSST elections in effect as of Date 3. In addition, Company and
Company’s shareholders agree to make any adjustments consistent with the treatment
of Company 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) 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) provides that, for purposes of § 1361(b)(1)(B), a trust all
of which is treated (under subpart E of part I of subchapter J of chapter 1 of the Internal
Revenue Code) as owned by an individual who is a citizen or resident of the United
States may be a shareholder.

Section 1361(d)(1) provides, in pertinent part, that in the case of a QSST with
respect to which a beneficiary makes an election under § 1361(d)(2): (A) the trust is
treated as a trust described in § 1361(c)(2)(A)(i) and (B) for purposes of § 678(a), the
beneficiary of the trust is treated as the owner of that portion of the trust which consists

PLR-133916-14 3

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 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).

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 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 pertinent 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 such termination were inadvertent, (3) no later than a
reasonable period of time after discovery of the circumstances resulting in such
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 specified pursuant to § 1362(f), agrees to make such adjustments
(consistent with the treatment of such corporation as an S corporation) as may be
required by the Secretary with respect to such period, then, notwithstanding the
circumstances resulting in such termination, such corporation shall 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
Company’s S corporation election terminated on Date 3 because the beneficiaries of the
Trusts failed to make elections under § 1361(d)(2)(A) for the Trusts. We also conclude
that the termination of Company’s S corporation election was inadvertent within the
meaning of § 1362(f).

Accordingly, under § 1362(f), Company will be treated as continuing to be an S
corporation from Date 3 and thereafter, provided that Company’s S corporation election
was valid and was not otherwise terminated under § 1362(d), and provided that the

PLR-133916-14 4

beneficiaries of the Trusts file an election under § 1361(d)(2)(A) for their respective trust
with an effective date of Date 3 with the appropriate service center within 120 days from
the date of this letter. A copy of this letter should be attached to the elections under
§ 1361(d)(2)(A).

Except as expressly provided herein, we express or imply no opinion concerning
the Federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, we express or imply no opinion concerning
whether the Trusts are otherwise eligible to be QSSTs or whether Company is
otherwise eligible to be an S corporation for Federal tax purposes.

In accordance with a power of attorney on file with this office, we are sending a
copy of this letter to Company’s authorized representatives.

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.

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,

/s/

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

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

cc: