Late QSST election receives limited S termination relief

Plain-English summary

An S corporation shareholder's stock passed from one trust to a second trust that could qualify as a qualified Subchapter S trust. The beneficiary did not timely file the QSST election, causing the corporation's S election to terminate. The IRS found that termination inadvertent and granted relief for the period before the shareholders later transferred all stock to another ineligible shareholder. The corporation was therefore treated as an S corporation from the missed QSST election date until the later stock transfer, when its S status terminated independently. Relief was conditioned on the beneficiary filing a retroactive QSST election within 120 days.

Ruling snapshot

• Question: Could the corporation preserve S status for the period affected by an inadvertently late QSST election?
• Outcome: approved through the later independent termination date
• Key authorities: IRC §§ 1361(d), 1362(d), and 1362(f); Treas. Reg. §§ 1.1361-1(j)(6)(ii) and 1.1362-4

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201710018 Third Party Communication: None
Release Date: 3/10/2017 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
------------------- --------------------------, ID No. --------------
----------------------------------------------- Telephone Number:
----------------------------- ----------------------
------------------------------------- Refer Reply To:
CC:PSI:03
PLR-125623-16
Date:

                                                          December 8, 2016

LEGEND

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

Y = ----------------------------------------------------------------------------------------------------------------

Shareholder = ------------------------

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

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

Beneficiary = ----------------------------------------------------------------------------------------------------------------
-------------

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

D1 = ------------------

D2 = -------------------

D3 = ------------------

D4 = -------------------

Dear -----------------:
PLR-125623-16 2

    This letter responds to a letter dated August 15, 2016, submitted on behalf of X

by its authorized representative requesting a ruling under § 1362(f) of the Internal
Revenue Code (Code).
FACTS

   The information submitted states that X was organized under the laws of State

on D1 and elected to be an S corporation effective D1. On D2, Shareholder transferred
his shares in X to Trust1, an eligible shareholder. On D3, Shareholder died, and all
assets of Trust1 were transferred to Trust2. Trust2 was eligible to be a qualified
Subchapter S trust (QSST); however, Beneficiary of Trust2 did not timely file a QSST
election. Therefore, on D3, X’s S corporation election terminated. On D4, X’s
shareholders transferred all of their stock to Y, an ineligible shareholder.

   X represents that the termination event on D3 was not motivated by tax

avoidance or retroactive tax planning. X further represents that X and its shareholders
have filed consistently with the treatment of X as an S corporation from D1 through D4.
X and its shareholders have agreed to make any adjustments that the Commissioner
may require, consistent with the treatment of X as an S corporation.

                              LAW AND ANALYSIS

  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 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) provides that the term “small business corporation” means 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 one class of stock.

   Section 1361(d)(1) provides that a QSST whose beneficiary makes an election

under § 1361(d)(2) will be treated as a trust described in § 1361(c)(2)(A)(i), and the
beneficiary of such trust shall be treated as the owner (for purposes of § 678(a)) 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 (or his legal

representative) may elect to have § 1361(d) apply. Section 1361(d)(2)(D) provides that
PLR-125623-16 3

an election under § 1361(d)(2) shall be effective up to 15 days and 2 months before the
date of the election.

    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 where the corporation files its income tax return the
applicable form or a statement including the information listed in § 1.1361-1(j)(6)(ii).

   Section 1362(d)(2)(A) provides that an election under § 1362(a) will 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 relevant 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 the termination were inadvertent, (3) no
later than a reasonable period of time after discovery of the circumstances resulting in
the termination, steps were taken (A) 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 pursuant to § 1362(f), agrees to
make such adjustments (consistent with the treatment of the corporation as an S
corporation) as may be required by the Secretary with respect to such period, then,
notwithstanding the circumstances resulting in the termination, the corporation will be
treated as an S corporation during the period specified by the Secretary.

   Section 1.1362-4(b) provides, in relevant part, that for purposes of § 1.1362-4(a),

the determination of whether a termination was inadvertent is made by the
Commissioner. The corporation has the burden of establishing that under the relevant
facts and circumstances the Commissioner should determine that the termination was
inadvertent. The fact that the terminating event was not reasonably within the control of
the corporation or was not part of a plan to terminate the election, or the fact that the
terminating event or circumstance took place without the knowledge of the corporation,
notwithstanding its due diligence to safeguard itself against such an event or
circumstance, tends to establish that the termination was inadvertent.

   Section 1.1362-4(d) provides, in part, that the Commissioner may require any

adjustments that are appropriate. In general, the adjustments should be consistent with
the treatment of the corporation as an S corporation during the period specified by the
Commissioner.

                                  CONCLUSION

   Based solely on the facts submitted and the representations made, we conclude

that X’s S corporation election terminated on D3. We also conclude that, had X’s S
PLR-125623-16 4

corporation election not terminated on D3, it would have terminated on D4. We further
conclude that the circumstances resulting in the termination on D3 were inadvertent
within the meaning of § 1362(f).

    Accordingly, under § 1362(f), X will be treated as an S corporation from D3 until

its termination on D4, provided X’s S corporation election was otherwise valid and has
not otherwise terminated under § 1362(d).

    This ruling is conditioned on Beneficiary of Trust2 filing an QSST election,

effective D3, with the appropriate service center within 120 days of the date of this
letter. A copy of this letter should be attached to the QSST election.

   Except as specifically ruled above, we express no opinion concerning the federal

tax consequences of the facts described above under any other provisions of the Code.
Specifically, we express no opinion regarding X’s eligibility to be an S corporation.

  This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter to X’s authorized representative.

                                  Sincerely,



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

Enclosures (2):

   Copy of this letter
   Copy for § 6110 purposes