Corporation receives relief for missing S election consent and QSST election

Plain-English summary

A corporation intended to elect S corporation status while its shares were held by two trusts. A required shareholder consent may have been missing, and the beneficiary of one trust did not timely elect qualified subchapter S trust status. The IRS found that these failures made the S election ineffective but were inadvertent. It allowed the corporation to be treated as an S corporation from the intended date, provided that a completed Form 2553 and the QSST election were filed within 120 days and the S election was otherwise valid.

Ruling snapshot

• Question: Could the corporation obtain relief for a missing S election consent and an untimely QSST election?
• Outcome: Approved as an inadvertent invalid election, with corrective filings due within 120 days.
• Key authorities: IRC §§ 1361(d) and 1362(f); Treas. Reg. § 1.1361-1

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201610005                                              Third Party Communication: None
Release Date: 3/4/2016                                         Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.01-01,
              1362.04-00                                       Person To Contact:
                                                               -----------------------, ID No. -----------------
---------------------------------                              Telephone Number:
--------------------------------                               ---------------------
-------------------------------------------                    Refer Reply To:
 --------------------------------------                        CC:PSI:1
                                                               PLR-119535-15
                                                               Date:
                                                               November 20, 2015




Legend

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

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

Trust1 =          ------------------------------------------------

Trust2 =           --------------------------------------------------------------------------------------------------
------------------------------------------

Year =            -------

Date =            ----------------------

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

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

This responds to a letter dated June 5, 2015, and supplemental correspondence,
submitted on behalf of X by X’s authorized representatives, requesting a ruling under §
1362(b)(5) and § 1362(f) of the Internal Revenue Code (Code).

                                                       FACTS

According to the information submitted, X was incorporated in Year under the laws of
State. X elected to be an S corporation effective Date. As of Date, X’s shareholders
were Trust1 and Trust2. X represents that Trust1 is a grantor trust and Trust 2 meets
the definition of a “qualified subchapter S trust” (QSST) under § 1361(d)(3). However,
PLR-119535-15                                 2

the required consent to X’s S corporation election may not have been obtained from A,
the trustee of Trust1. Further, no election was made to treat Trust2 as a QSST effective
Date.

X represents that there was no tax avoidance or retroactive tax planning involved in the
failure of A to properly execute X’s Form 2553, Election by a Small Business
Corporation, or in the failure of Trust2 to timely file a QSST election. X further
represents that X and its shareholders have treated X as an S corporation and Trust2
as a QSST since Date. 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).

Section 1361(d)(2)(A) provides that a beneficiary of a QSST (or his legal representative)
may election to have § 1362(d) apply.
PLR-119535-15                                 3

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 as a result of the missing consent to X’s S
corporation election and the failure of the beneficiary of Trust2 to make a QSST election
under § 1361(d)(2) for Trust2. 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
and thereafter, provided that X’s S corporation election was otherwise valid and not
otherwise terminated under § 1362(d).

As a condition of this ruling, X must submit a properly completed Form 2553, Election
by a Small Business Corporation, with an effective date of Date, to the appropriate
service center within 120 days from the date of this letter. The beneficiary of Trust2
must also file an election under § 1361(d)(2)(A) for Trust2 with an effective date of Date
PLR-119535-15                                  4

with the appropriate service center within 120 days from the date of this letter. A copy
of this letter should be attached to both elections and to the consent statements.

Except as specifically provided herein, 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 Trust2 is
eligible to elect to be treated as a QSST.

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 the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                       Sincerely,


                                       Joy C. Spies
                                       Joy C. Spies
                                       Senior Technician Reviewer
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)

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


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