S status preserved and late ESBT and QSub elections allowed

Plain-English summary

An S corporation's election terminated when a trust inherited shares and its trustee failed to make a timely electing small business trust election. The corporation had also consistently treated one wholly owned subsidiary as a qualified subchapter S subsidiary but failed to file Form 8869 for that subsidiary. The IRS found the S termination inadvertent and treated S status as continuing. Within 120 days, the corporation had to make a specified adjustment payment, file the ESBT election, and submit all required original or amended returns consistent with the relief. The IRS also granted 120 days to file the late QSub election and confirmed the stated effective dates for eight subsidiaries, assuming each was otherwise eligible. The relief would be void if its conditions were not met.

Ruling snapshot

• Question: Could the corporation preserve S status after a missed ESBT election and obtain late QSub relief for a subsidiary?
• Outcome: Approved, conditioned on a specified payment, the ESBT and QSub filings, and consistent returns within 120 days.
• Key authorities: IRC §§ 1361 and 1362(f); Treas. Reg. §§ 1.1361-1(m), 1.1361-3, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201824004                                              Third Party Communication: None
Release Date: 6/15/2018                                        Date of Communication: Not Applicable
Index Number: 1362.01-01, 1362.04-00
                                                               Person To Contact:
----------------                                               ----------------, ID No. ------------------
-----------------------------------------------------          Telephone Number:
---------------------                                          --------------------
----------------------------------                             Refer Reply To:
                                                               CC:PSI:B01
                                                               PLR-126064-17
                                                               Date:
                                                               February 20, 2018


LEGEND

X        =         -------------------------
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Sub 1 =            --------------------------------------------------
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Sub 2 =            ------------------------------------------------------------------
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Sub 3 =            ------------------------------------
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Sub 4 =            -------------------------------------------------------------------------
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Sub 5 =            -------------------------------------
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Sub 6 =            --------------------------------------
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Sub 7 =           -------------------------

Sub 8 =            ---------------------------------------------
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Trust =            --------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
--------
PLR-126064-17                                             2

                  ---------------------------------------------------------------------
                  --------------------------

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

B        =         ------------------------------------
---------------------------------------------

C        =         ---------------------------------
---------------------------------------------

D        =         -------------------------------
---------------------------------------------

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

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

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

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

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

Date 6=           ------------------------

Date 7=           ---------------------

Date 8=           ---------------------

Date 9=           -------------------

Date 10=          ---------------------------

Date 11 =         ------------------------

Date 12 =         -------------------

Date 13 =         ---------------------------

Year =            -------
PLR-126064-17                                           3

Years 1 =       ---------------

Years 2 =       ---------------

Years 3 =       ---------------

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

$a      =       ---------------------------------------------------------------



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

This responds to a letter dated August 22, 2017, and subsequent correspondence,
submitted on behalf of X, by X’s authorized representative, requesting relief under
section 1362(f) of the Internal Revenue Code (the Code) and § 301.9100-3 of the
Procedure and Administration Regulations.

FACTS

According to the information submitted and representations within, X was incorporated
on Date 1, under the laws of State, and elected to be treated as an S corporation
effective Date 3.

On Date 2, A was an eligible S corporation shareholder of X. A died on Date 7. A’s
shares in X were transferred to Trust on Date 7. X represents that Trust was eligible to
make an ESBT election as of Date 7. However, as of Date 8, the trustee of Trust
inadvertently failed to timely file an Electing Small Business Trust (ESBT) election,
thereby causing Trust to become an ineligible shareholder of X. As a result, X’s S
election terminated effective Date 8. X took correction measures, and on Date 12, the
trustee of Trust transferred the X shares outright to B, C, and D, all eligible shareholders
of X.

X represents that other than the failure to make a timely ESBT election, Trust has at all
times, from Date 8 until it transferred its X shares on Date 12, met the requirements of
an ESBT under § 1361(d)(3). X represents that the failure to file the ESBT election for
Trust was discovered in Year. X represents that Trust will file consistently as if a valid
ESBT election is in place for Year. X represents it did not file consistently as if a valid
ESBT election was in place for Years 1. X shall make a payment of $a for Years 2. X
represents that it will file amended returns for Years 3.

Effective Date 3, X elected to treat Sub 1, Sub 4, Sub 5, Sub 6, and Sub 8 as Qualified
Subchapter S Subsidiaries (QSubs). X represents that, at all relevant times on and
PLR-126064-17                                 4

after Date 3, X has owned all of the outstanding stock of Sub 1, Sub 4, Sub 5, Sub 6,
and Sub 8. X represents that it has treated Sub 1, Sub 4, Sub 5, Sub 6, and Sub 8 as
QSubs effective Date 3 and thereafter and that X has filed tax returns for all relevant tax
years consistent with the treatment of Sub 1, Sub 4, Sub 5, Sub 6, and Sub 8 as
QSubs.

X also made QSub elections for Sub 2 effective Date 6, and Sub 7 effective Date 5. X
represents that, at all relevant times on and after Date 6, X has owned all of the
outstanding stock of Sub 2 and that, at all relevant times on and after Date 5, X has
owned all of the outstanding stock of Sub 7. X represents that it has treated Sub 2 and
Sub 7 as QSubs effective Date 6 and Date 5, respectively, and thereafter and that X
has filed tax returns for all relevant tax years consistent with the treatment of Sub 2 and
Sub 7 as QSubs.

X represents that as of Date 10, Sub 1, Sub 2, Sub 4, Sub 5 and Sub 6 were merged
into X. X represents that as of Date 9, Sub 7 was dissolved and that as of Date 11, Sub
8 was dissolved.

Sub 3 was incorporated under the laws of State on Date 4. X represents that, at all
times on and after Date 4, X has owned all of the outstanding stock of Sub 3 and
intended to elect to treat Sub 3 as a QSub effective Date 4. However, due to
inadvertence, X failed to file Form 8869, Qualified Subchapter S Subsidiary Election. X
represents that at all times on and after Date 4, X has treated Sub 3 as a Qsub and that
X has filed tax returns for all relevant tax years consistent with the treatment of Sub 3 as
a QSub. X represents that the failure to file the QSub election for the Sub 3 was
discovered in Year.

X represents that on Date 13, all of its stock was sold in a transaction in which the
parties made an election under section 338(h)(10). As a result, Sub 3’s Qsub status
terminated Date 13.

X represents that the circumstances resulting in the failure to make the QSub and ESBT
elections were inadvertent and not motivated by tax avoidance or retroactive tax
planning. In addition, X represents that the termination of its S corporation election was
inadvertent and was not motivated by tax avoidance or retroactive tax planning. X
further represents that X has filed its income tax returns consistent with having a valid S
election in effect for all taxable years since X elected to be an S corporation. X
represents that other than the failure to make a valid QSub election and a valid ESBT
election, X has qualified as a small business corporation at all times since its election on
Date 3. Lastly, X and its shareholders agree to make any adjustments required as a
condition of obtaining relief under § 1362(f) that may be required by the Secretary.
PLR-126064-17                                 5


LAW AND ANALYSIS

Section 1361(a) provides that an S corporation is a small business corporation for which
an election under § 1362(a) is in effect.

Section 1361(b)(1) provides that the terms “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 1 class of stock.

Section 1361(b)(3)(A) generally provides that a QSub shall not be treated as a separate
corporation and all assets, liabilities, and items of income, deduction, and credit of a
QSub shall be treated as assets, liabilities, and such items (as the case may be) of the
S corporation.

Section 1361(b)(3)(B) defines a QSub as a domestic corporation which is not an
ineligible corporation, if 100 percent of the stock of the corporation is owned by the S
corporation, and the S corporation elects to treat the corporation as a Qualified
subchapter S subsidiary .

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated
whenever (at any time on or after the 1st day of the 1st taxable year for which the
corporation is an S corporation) such corporation ceases to be a small business
corporation.

Section 1361(c)(2)(A)(i) of the Code provides that for purposes of section 1361(b)(1) a
trust all of which is treated (under subpart E of part I of subchapter J of this chapter) as
owned by an individual who is a citizen or resident of the United States may be an S
corporation shareholder.

Section 1361(c)(2)(A)(v) provides that for purposes of § 1361(b)(1)(B), an ESBT is a
permissible shareholder.

Section 1361(e)(3) provides that an election under § 1361( e) shall be made by the
trustee. Any such election shall apply to the taxable year of the trust for which made and
all subsequent taxable years of such trust unless revoked with the consent of the
Secretary.

Section 1.1361-1(m)(2)(i) provides that the trustee of an ESBT must make the ESBT
election by signing and filing, with the service center where the S corporation files its
income tax return, a statement that meets the requirements of § 1.1361-1(m)(2)(ii).
PLR-126064-17                                 6

Section 1.1361-1(m)(2)(iii) provides that the trustee of an ESBT must file the ESBT
election within the time requirements prescribed in § 1.1361-1(j)(6)(iii) for filing a QSST
election (generally within the 16-day-and-2-month period beginning on the day that the
stock is transferred to the trust).

Section 1.1361-3(a) prescribes the time and manner for making an election to be
classified as a QSub.

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); (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 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
ineffectiveness or termination, such corporation shall be treated as an S corporation
during the period specified by the Secretary.

Section 301.9100-1(c) provides that the Commissioner may grant a reasonable
extension of time to make a regulatory election, or a statutory election (but no more than
6 months except in the case of a taxpayer who is abroad), under all subtitles of the
Code except subtitles E, G, H, and I. Section 301.9100-1(b) defines the term “regulatory
election” as an election whose due date is prescribed by a regulation published in the
Federal Register or a revenue ruling, revenue procedure, notice, or announcement
published in the Internal Revenue Bulletin.

Section 301.9100-2 provides the rules governing automatic extensions of time for
making certain elections.

Section 301.9100-3 provides the standards the Commissioner will use to determine
whether to grant an extension of time for regulatory elections that do not meet the
requirements of § 301.9100-2. Under § 301.9100-3, a request for relief will be granted
when the taxpayer provides evidence to establish to the satisfaction of the
Commissioner that (1) the taxpayer acted reasonably and in good faith, and (2) granting
relief will not prejudice the interests of the Government.
PLR-126064-17                                7


CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that
the failure of Trust to make an ESBT election effective Date 8 caused an inadvertent
termination of X’s S corporation election within the meaning of § 1362(f) on Date 8.
Pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S
corporation beginning on and after Date 3 unless X's S corporation election is otherwise
terminated under § 1362(d).

This letter ruling is subject to the following conditions. No later than 120 days from the
date of this letter: (1) an adjustment payment in the amount of $a for Years 2 and a
copy of this letter ruling must be sent to the following address: Internal Revenue
Service, Cincinnati Service Center, 201 West Rivercenter Blvd., Covington, KY 41011,
Stop 31, Terri Lackey, Manual Deposit; (2) an election to treat Trust as an ESBT
effective Date 8, must be made with the appropriate service center. A copy of this letter
should be attached to the ESBT election; and (3) X and each of its shareholders must
file any original and amended returns for all open taxable years consistent with the relief
granted in this letter. If these conditions are not met, then this ruling is null and void.
Furthermore, if these conditions are not met, X must send notification that its S election
has terminated to the service center with which X’s S election was filed.

Furthermore, based solely on the facts submitted and representations made, we
conclude that the requirements of § 9100-3 have been satisfied. Accordingly, X is
granted an extension of time of 120 days from the date of this letter to elect to treat Sub
3 as a QSub effective Date 4. The election should be made by filing Form 8869 with the
appropriate service center, and a copy of this letter should be attached to the election.

Finally, Sub 1, Sub 4, Sub 5, Sub 6, and Sub 8 will be treated as QSubs effective Date
3 and thereafter, provided Sub 1, Sub 4, Sub 5, Sub 6, and Sub 8 are otherwise eligible
to be treated as QSubs. Sub 2 will be treated as a QSub effective Date 6, Sub 3 will be
treated as a QSub effective Date 4, and Sub 7 will be treated as a QSub effective
Date5, provided Sub 2, Sub 3, and Sub 7 are otherwise eligible to be treated as QSubs.

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.

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-126064-17                                8

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

                                      Sincerely,

                                      Wendy L. Kribell

                                      Wendy L. Kribell
                                      Assistant to the 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