S status preserved after three trusts missed QSST elections

Plain-English summary

Three trusts received shares in an S corporation, but their beneficiaries failed to make timely qualified subchapter S trust elections. The trusts were therefore ineligible shareholders and the corporation's S election terminated. The corporation represented that the failures were inadvertent, were not motivated by tax avoidance or retroactive planning, and that the corporation and its shareholders had consistently filed as though S status continued. The IRS treated the termination as inadvertent and allowed the corporation to remain an S corporation from the transfer date forward. Relief was conditioned on each beneficiary filing a retroactive QSST election within 120 days. The IRS did not determine whether the trusts or corporation otherwise qualified for their claimed status.

Ruling snapshot

• Question: Could the corporation retain S status after beneficiaries of three shareholder trusts missed their QSST elections?
• Outcome: Approved, conditioned on all three QSST elections being filed within 120 days.
• Key authorities: IRC §§ 1361(d) and 1362(f); Treas. Reg. § 1.1361-1(j)(6)(ii)

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201823003                                            Third Party Communication: None
Release Date: 6/8/2018                                       Date of Communication: Not Applicable
Index Number: 1362.04-00, 1361.03-02
                                                             Person To Contact:
---------------------------------------------                -----------------------, ID No. -------------------
------------------------------------------                   ---------------------------------------------------
-----------------------------                                Telephone Number:
 ----------------------------------------                    --------------------
                                                             Refer Reply To:
                                                             CC:PSI:B3
                                                             PLR-130159-17
                                                             Date:
                                                             March 13, 2018



Legend

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

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

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

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

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

Trust 1 = -----------------------------------------------------------------------------
--------------------------------------

Trust 2 = ----------------------------------------------------------------------
--------------------------------------

Trust 3 = ----------------------------------------------------------------------
--------------------------------------

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


This letter responds to a letter dated August 31, 2017, and subsequent correspondence,
submitted on behalf of X by its authorized representatives, requesting a ruling under
§ 1362(f) of the Internal Revenue Code (Code).
PLR-130159-17                                 2



                                           Facts

        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. Each of Trust 1, Trust 2,
and Trust 3 received shares in X on Date 3. X represents that Trust 1, Trust 2, and
Trust 3 have been eligible to elect qualified subchapter S trust (QSST) treatment under
§ 1361(d) since Date 3. However, the respective beneficiaries of the trusts
inadvertently failed to timely make a QSST election with respect to these trusts. As a
result, X’s S corporation election terminated on Date 3.

        X represents that the respective failures to file QSST elections were inadvertent
and not motivated by tax avoidance or retroactive tax planning. X further represents
that from Date 3, X and its shareholders have filed all returns consistent with X’s status
as an S corporation. 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) 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 of part I of subchapter J of chapter 1 of the Internal
Revenue Code) as owned by an individual who is a citizen or resident of the United
States may be a shareholder.

       Section 1361(d)(1) provides, in pertinent part, that in the case of a QSST with
respect to which a beneficiary makes an election under § 1361(d)(2): (A) the trust is
treated as a trust described in § 1361(c)(2)(A)(i) and (B) 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 an S corporation with respect to which the election under § 1361(d)(2) is
made.
PLR-130159-17                                 3

      Section 1361(d)(2)(A) provides that a beneficiary of a QSST (or his legal
representative) may elect to have § 1361(d) 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 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 1362(d)(2)(A) provides that an election under § 1362(a) shall 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 pertinent 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 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 such 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 representations made, we conclude that
X’s S corporation election terminated on Date 3 because the beneficiaries of Trust 1,
Trust 2, and Trust 3 failed to make elections under § 1361(d)(2)(A) for these trusts. We
also conclude that the termination of X’s S corporation election was inadvertent within
the meaning of § 1362(f).

        Accordingly, under § 1362(f), X will be treated as continuing to be an S
corporation from Date 3 and thereafter, provided that X’s S corporation election was
valid and was not otherwise terminated under § 1362(d), and provided that the
beneficiaries of Trust 1, Trust 2, and Trust 3 file an election under § 1361(d)(2)(A) for
their respective trusts with an effective date of Date 3 with the appropriate service
PLR-130159-17                                 4

center within 120 days from the date of this letter. A copy of this letter should be
attached to the elections under § 1361(d)(2)(A).

       Except as expressly provided herein, we express or imply no opinion concerning
the Federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, we express or imply no opinion concerning
whether Trust 1, Trust 2 or Trust 3 are otherwise eligible to be QSSTs or whether X is
otherwise eligible to be an S corporation for Federal tax purposes.

      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.

      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.

       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.


                                       Sincerely,



                                       Caroline E. Hay
                                       Assistant to the Branch Chief, Branch 3
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)




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


cc: