Missed QSST election does not terminate S corporation status

Plain-English summary

An S corporation shareholder died, and shares passed from the estate to a trust intended to qualify as a qualified subchapter S trust. The trustee failed to make the required QSST election, which caused the corporation's S election to terminate when the shares entered the trust. The corporation represented that the error was inadvertent, was not motivated by tax avoidance, and was corrected promptly after discovery. The IRS treated the corporation as continuously eligible for S corporation status, provided the trustee filed the QSST election and required amended returns or adjustments within 120 days. The ruling did not decide whether the corporation or trust otherwise qualified for their intended tax status.

Ruling snapshot

• Question: Was the S corporation termination caused by the missed QSST election inadvertent under section 1362(f)?
• Outcome: approved, conditioned on corrective filings within 120 days
• Key authorities: IRC §§ 1361(d), 1362(f)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201749006                                             Third Party Communication: None
Release Date: 12/8/2017                                       Date of Communication: Not Applicable
Index Number: 1362.04-00
                                                              Person To Contact:
---------------------------                                   --------------------, ID No. ------------------
------------------------
--------------                                                Telephone Number:
--------------------------                                    ----------------------
----------------------------                                  Refer Reply To:
                                                              CC:PSI:B03
                                                              PLR-113266-17
                                                              Date:
                                                              September 5, 2017




                                                   LEGEND


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

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

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

Date 3       =     ------------------

Date 4       =     --------------------

Date 5       =     -----------------

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

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

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



Dear ----------------:
PLR-113266-17                              2

       This letter responds to a letter dated April 19, 2017, and subsequent
correspondence, submitted on behalf of X, requesting a ruling under § 1362(f) of the
Internal Revenue Code (the Code).

                                          FACTS

      The information submitted states that X was incorporated under the laws of State
on Date 1 and elected to be treated as an S corporation effective Date 2.

        A, a shareholder of X, died on Date 3. On Date 4, pursuant to the terms of A’s
will, shares of X were transferred from A’s estate to Trust. X represents that Trust
qualifies as a qualified subchapter S trust (QSST) within the meaning of § 1361(d)(3).
However, the trustee of Trust failed to make an election under § 1361(d)(2) to treat
Trust as a QSST. As a result, X’s S corporation election terminated on Date 4.

        X represents that the failure to file a QSST election and the resulting termination
of its S corporation election were inadvertent and were not motivated by tax avoidance
or retroactive tax planning. Further, immediately upon the discovery of the termination,
X and its shareholders took corrective action to rectify the situation and to restore X’s
status as an S corporation, including the transfer of X stock to certain eligible
shareholders on Date 5. Additionally, 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

       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 section
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
one class of stock.

       Section 1361(d)(1) provides that a QSST whose beneficiary makes an election
under § 1362(d)(2) will be treated as a trust described in § 1361(c)(2)(A)(i), and the
QSST’s beneficiary will be treated as the owner (for purposes of § 678(a)) of that
portion of the QSST’s S Corporation stock to which the election under § 1361(d)(2)
applies. Under § 1361(d)(2)(A), a beneficiary of a QSST may elect to have § 1361(d)
apply. Under § 1361(d)(2)(D), this election will be effective up to 15 days and two
months before the date of the election.
PLR-113266-17                               3

        Section 1361(d)(3) defines a QSST as a trust (A) the terms of which require that
(i) during the life of the current income beneficiary, there shall be only one income
beneficiary of the trust; (ii) any corpus distributed during the life of the current income
beneficiary may be distributed only to such beneficiary; (iii) the income interest of the
current beneficiary in the trust shall terminate on the earlier of the beneficiary’s death or
the termination of the trust; and (iv) upon the termination of the trust during the life of the
current income beneficiary, the trust shall distribute all of its assets to that beneficiary;
and (B) all of the income (within the meaning of § 643(b) of which is distributed (or
required to be distributed) currently to one individual who is a citizen or resident of the
United States.

       Section 1362(f) provides, in relevant part, that if (1) an election under § 1362(a)
by any corporation 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, (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
ineffectiveness, steps were taken so that the corporation is once more 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 any adjustments (consistent with the treatment of the corporation as an S
corporation) as may be required by the Secretary with respect to the period, then,
notwithstanding the circumstances resulting in the ineffectiveness, the corporation shall
be treated as continuing to be 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 Date 4 when the trustee of Trust failed to
file a QSST election under § 1361(d)(2). We further conclude that the termination of X's
S corporation election was inadvertent within the meaning of § 1362(f). Therefore,
under § 1362(f) X will be treated as continuing to be an S corporation on and after
Date 4, provided X's S corporation election was otherwise valid and not otherwise
terminated under § 1362(d).

        This ruling is contingent on the following: (1) the trustee of Trust filing a QSST
election effective Date 4 with the appropriate service center within 120 days of the date
of this letter; (2) a copy of this letter should be attached to the QSST election; and (3)
Trust filing within 120 days of the date of this letter any amended returns and making
adjustments that are consistent with the requested treatment of Trust as a QSST.

       If the above conditions are not met, then this ruling is null and void. In addition, if
these conditions are not met, X must send notification that its S corporation election has
terminated to the service center with which X’s S corporation election was filed.
PLR-113266-17                              4


         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 or Trust’s eligibility to be a QSST.

      This ruling is directed only to the taxpayer who requested it. According to
§ 6110(k)(3) of the Code, this ruling 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.

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


                                               Sincerely,




                                               Richard T. Probst
                                               Senior Technician Reviewer, Branch 3
                                               Office of the Associate Chief Counsel
                                               (Passthroughs & Special Industries)

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