Late QSST election does not end the corporation's S status

Plain-English summary

After an S corporation shareholder died, the shareholder's stock passed under a will to a trust intended to qualify as a qualified Subchapter S trust. The trust beneficiary did not timely file the QSST election, causing the corporation's S election to terminate when the stock entered the trust. The corporation represented that the failure was inadvertent, not tax-motivated, and that all affected returns consistently treated it as an S corporation. The IRS granted inadvertent-termination relief and treated S status as continuing, provided the beneficiary files a QSST election effective on the transfer date within 120 days and no other termination occurred. The ruling did not decide whether the trust otherwise met the QSST requirements.

Ruling snapshot

• Question: Was the S election termination caused by the beneficiary's late QSST election inadvertent?
• Outcome: Approved, subject to filing the QSST election within 120 days.
• Key authorities: IRC §§ 1361(c)(2), 1361(d), 1362(d), 1362(f), and 678(a)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201614019                                              Third Party Communication: None
Release Date: 4/1/2016                                         Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.03-02
                                                               Person To Contact:
----------------------------------------                       --------------, ID No. ----------------
-----------------------------------                            Telephone Number:
------------------------------------------                     --------------------
--------------------------------------                         Refer Reply To:
                                                               CC:PSI:B01
                                                               PLR-126940-15
                                                               Date:
                                                               January 05, 2016


LEGEND

X        =         -----------------------------------
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A        =         ----------------------------
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B        =         --------------------
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Trust =            --------------------------------------------------------------------------------------------------
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Date1 =           ------------------

Date2 =           ---------------------

Date3 =           ------------------

Date4 =           ---------------------------

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



Dear -----------------:
PLR-126940-15                               2

This responds to a letter dated August 7, 2015, and subsequent correspondence,
submitted on behalf of X by X’s authorized representative, requesting relief under
section 1362(f) of the Internal Revenue Code.

FACTS

According to the information submitted, X was incorporated on Date1 under the laws of
State. Effective Date2, X elected to be taxed as an S corporation.

On Date3, A, a shareholder of X, died. Pursuant to A’s will, A’s X shares were
transferred to Trust on Date4.

As of Date4, X represents that Trust was intended to be treated as a qualified
subchapter S trust (QSST). However, B, the beneficiary of Trust, did not file a timely
election to treat Trust as a QSST, therefore causing X’s S corporation election to
terminate as of Date4.

X represents that the circumstances resulting in the failure to file a QSST election for
Trust were inadvertent and were not motivated by tax avoidance or retroactive tax
planning. X and its shareholders represent that they have filed their federal income tax
returns consistent with the requested relief. X and its shareholders have agreed to
make such 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) of the Code 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) 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(c)(2)(A)(iii) provides that a trust may be an S corporation shareholder with
respect to stock transferred to it pursuant to a will, but only for the 2-year period
beginning on the day on which such stock is transferred to it.
PLR-126940-15                                3


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 the trust
is treated as the owner of that portion of the trust which consists of stock in a S
corporation with respect to which the election under § 1361(d)(2) is made.

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) or § 1361(b)(3)(C); (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 the 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 the representations made, we conclude that
X’s S corporation election terminated on Date4 as a result of the failure to make a timely
QSST election for Trust. We further conclude that the termination of X’s S election on
Date4 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 as of Date4 and
thereafter, provided that B files a QSST election for Trust with an effective date of Date4
with the appropriate service center within 120 days from the date of this letter, and X's S
corporation election is not otherwise terminated under § 1362(d). A copy of this letter
must be attached to the QSST election.

Except as specifically ruled upon above, we express or imply no opinion concerning the
federal tax consequences of the facts of this case under any other provision of the
Code. Specifically, we express or imply no opinion regarding X’s eligibility to be an S
corporation. Further, no opinion is expressed or implied concerning whether Trust
meets the requirements of a QSST under § 1361(d)(3).

This ruling is directed only to the taxpayer who requested it. According to § 6110(k)(3),
this ruling may not be used or cited as precedent.
PLR-126940-15                                4

Pursuant to the power of attorney on file with this office, we are sending a copy of this
letter to your authorized representative.


                                      Sincerely,


                                      David R. Haglund
                                      David R. Haglund
                                      Branch Chief, Branch 1
                                      Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)



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




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