S corporation receives relief for missing trust election and consents

Plain-English summary

A corporation's S election was ineffective because a trust beneficiary did not make a qualified subchapter S trust election and two shareholders did not properly consent. The corporation and its shareholders had consistently treated the corporation as an S corporation and the trust as a qualified trust, and they represented that the failures did not involve tax avoidance or retroactive tax planning. The IRS found the invalid election inadvertent and allowed the corporation to be treated as an S corporation from the intended effective date. Relief requires the trust beneficiary to file the trust election and the relevant shareholders to submit written consents within 120 days. The IRS did not determine whether the corporation otherwise qualified as an S corporation or whether the trust was eligible for the requested treatment.

Ruling snapshot

• Question: Could an ineffective S corporation election be treated as valid despite a missing trust election and shareholder consents?
• Outcome: approved, subject to filing the trust election and required consents within 120 days
• Key authorities: IRC §§ 1361(d) and 1362(f); Treas. Reg. § 1.1362-6(b)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201714018 Third Party Communication: None
Release Date: 4/7/2017 Date of Communication: Not Applicable
Index Numbers:1362.01-00, 1362.01-01,
1362.04-00 Person To Contact:
-----------------------, ID No. -------------------
------------------------------------------------------------ ---------------------------------------------------

• Telephone Number:
  ------------------------------------------------- --------------------
  ------------------------------------- Refer Reply To:
  ------------------------------ CC:PSI:B3
  PLR-123126-16
  Date:
  January 12, 2017

                                               Legend
  

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

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

Estate = -------------------------------------

Trust = --------------------------------------------------

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

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

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

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

   This letter responds to a letter dated July 22, 2016, and subsequent

correspondence, submitted on behalf of X by its authorized representatives, requesting
a ruling under § 1362(f) of the Internal Revenue Code (Code).

                                                  Facts

PLR-123126-16 2

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

on Date 1. X elected to be an S corporation effective Date 2. However, no election was
made to treat Trust as a qualified subchapter S trust (QSST) effective Date 2. It is
represented that Trust meets the definition of a QSST under § 1361(d)(3). In addition,
A and Estate did not properly consent to X’s S corporation election. Accordingly, X’s S
corporation election was ineffective. In addition, you represent that certain consents to
X’s S corporation election lacked some of the information required in such consents by
§§ 1.1362-6(b)(1) or (b)(2).

    X represents that there was no tax avoidance or retroactive tax planning involved

in the failure of Trust to timely file a QSST election or in A or Estate’s failure to consent
to X’s S corporation election. It is represented that X and its shareholders have treated
X as an S corporation and Trust as a QSST since Date 2. 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 1361(d)(2)(A) provides that a beneficiary of QSST (or his legal

representative) may elect to have § 1362(d) apply.

PLR-123126-16 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 2 as a result of the failure of the
beneficiary of Trust to make a QSST election under § 1361(d)(2) for Trust and the
failure of A and Estate to consent to X’s S corporation election. 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 2 and thereafter provided that X’s S corporation
election was otherwise valid and not otherwise terminated under § 1362(d).

   This ruling is contingent on the beneficiary of Trust filing an election under

§ 1361(d)(2)(A) for Trust with an effective date of Date 2 with the appropriate service
center within 120 days from the date of this letter. A copy of this letter should be
attached to the election under § 1361(d)(2)(A) and to the consent statements. In

PLR-123126-16 4

addition, A and the beneficiaries of Estate must each sign a written statement as
described in § 1.1362-6(b)(1) consenting to X’s S corporation election effective Date 2.
The written statements must be filed with the appropriate service center within 120 days
from the date of this letter, indicating that the statement(s) are to be associated with X’s
originally filed Form 2553.

    Except as specifically ruled above, 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 Trust is
eligible to elect to be treated as a QSST.

   With regard to any defective consents to X’s S corporation election, we suggest

that you attempt to perfect such consents through the procedure described in § 1.1362-
6(b)(3)(iii).

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

of the Code provides that it may not be used or cited for precedent.

   Pursuant to a power of attorney on file, we are sending a copy of this letter to X’s

authorized representatives.

   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 rulings requested, it is subject to verification on examination.

                                   Sincerely,



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

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