S status preserved and late QSub election allowed

Plain-English summary

An S corporation owned all the stock of a subsidiary and consistently treated it as a qualified subchapter S subsidiary, but failed to file Form 8869. Separately, three trusts holding all of the parent's stock became ineligible shareholders when their trustees failed to make timely electing small business trust elections after the income beneficiary died. The IRS found the resulting termination of the parent's S election inadvertent and treated S status as continuing. It also granted 120 days to file the late QSub election for the subsidiary. Relief required the three ESBT elections, the QSub election, and any necessary consistent amended returns to be filed within 120 days. The IRS did not determine whether the parent, subsidiary, or trusts otherwise qualified for their claimed tax status.

Ruling snapshot

• Question: Could the parent preserve its S election after missed ESBT elections and make a late QSub election for its wholly owned subsidiary?
• Outcome: Approved, conditioned on filing the three ESBT elections, Form 8869, and consistent amended returns within 120 days.
• Key authorities: IRC §§ 1361(b)(3) and 1362(f); Treas. Reg. §§ 1.1361-3 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201824007                                              Third Party Communication: None
Release Date: 6/15/2018                                        Date of Communication: Not Applicable
Index Number: 1361.05-00, 1362.00-00,
              1362.04-00, 9100.31-00                           Person To Contact:
                                                               -------------------------, ID No. -----------------
-----------------------                                        -----------------------------------------------------
---------------------------                                    Telephone Number:
--------------------------                                     ----------------------
 -----------------------------                                 Refer Reply To:
                                                               CC:PSI:B03
                                                               PLR-128092-17
                                                               Date:
                                                               March 06, 2018


LEGEND

X                 =        -------------------------------
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Y                 =        ------------------------------

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

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

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

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

Trust3            =         --------------------------------------------------------------------
-----------------------------------------------------
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---------------------------------------------------

Trust4            =         -------------------------------------------------------------------------
------------------------------------------------------------------------
---------------------------------------------------

State1            =        --------------

State2            =        -----------
PLR-128092-17                                           2


Date1           =        -----------------

Date2           =        ------------------------

Date3           =        ----------------------------

Date4           =        --------------------

Date5           =        --------------------------

Date6           =        -----------------

Date7           =        ---------------------

Date8           =        -----------------

Date9           =        --------------------

Date10          =        -----------------

N1              =        -----

N2              =        -----

N3              =        ----

N4              =        -----



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

       This responds to a letter dated September 14, 2017, and subsequent
correspondence, submitted on behalf of X by X’s authorized representative, requesting
a ruling under §1362(f) of the Internal Revenue Code (the Code), and an extension of
time under 301.9100-3 to make late election to treat Y as a qualified subchapter S
subsidiary (QSub) under § 1361(b)(3)(B)(ii) of the Code and § 1.1361-3 of the Income
Tax Regulations.

         The information submitted states that X was incorporated under the laws of
State1 on Date1. X elected to be taxed as an S corporation effective on Date2. Y was
incorporated under the laws of State2 on Date3. X has owned, and continues to own,
all of the issued and outstanding shares of Y at all times since the date of Y’s
PLR-128092-17                                3

incorporation. X represents that X and its shareholders always intended for X to treat Y
as a QSub, and all of X’s tax returns were filed consistent with this treatment from Y’s
date of formation. However, X failed to timely file Form 8869 to make the election to
treat Y as a QSub.

       A and B established Trust1 as an irrevocable trust on Date4 and transferred N1
shares of X to Trust1. A died on Date5, and B became the sole trustee and income
beneficiary of Trust1. On Date6, the assets of Trust1 were divided among Trust1
(Survivor’s Trust), Trust2 and Trust3. The information submitted states that Qualified
Subchapter S Trust (QSST) elections were properly and timely filed on behalf of Trust2
and Trust3 effective Date6. On Date7, B formed Trust4 as a successor to Trust1. In
addition, Trust4 was a revocable trust and was properly treated as a grantor trust for
purposes of § 671 of the Code from Date7 until Date8, when B died. At the time of B’s
death, Trust2 held N2 shares of X stock, Trust3 held N3 shares of X stock, and Trust4
held N4 shares of X stock (the sum of these amounts being the total number of issued
and outstanding shares of X).

        According to the information submitted, Trust2, Trust3 and Trust4 continued to
be eligible S corporation shareholders after the death of B on Date8, to Date9, pursuant
to § 1361(c)(2)(A)(ii). X further represents that Trust2, Trust3 and Trust4 meet the
requirements of § 1361(e)(1)(A) to be Electing Small Business Trusts (ESBTs), except
for the fact that no ESBT elections had been timely made on behalf of Trust2, Trust3
and Trust4 between B’s death on Date8 and Date10. Accordingly, the S corporation
election of X terminated on Date10 because Trust2, Trust3 and Trust4 were ineligible S
corporation shareholders of X beginning on that date.

       X represents that X and all of X’s shareholders have filed tax returns consistent
with X being an S corporation and filed returns for Y as if it was an QSub since Date3.
In addition, X represents that Trust2, Trust3 and Trust4 have filed tax returns consistent
with their treatment as ESBTs since Date10. X further represents that the
circumstances resulting in the termination of X’s S corporation election were inadvertent
and were not motivated by tax avoidance or retroactive tax planning. X and its
shareholders have agreed to make such adjustments consistent with the treatment of X
as an S corporation, Y as a QSub, and Trust2, Trust3 and Trust4 as ESBTs, as may be
required by the Secretary.

      RULINGS REQUESTED

      1. X requests relief under § 1362(f) for an inadvertent termination of its S
         election on Date10; and
      2. X requests an extension of time under § 301.9100-3 to make a late election to
         treat Y as a QSub effective Date3.
PLR-128092-17                                 4


       RULING 1

       Section 1362(f) provides that if (1) an election under § 1362(a) by a corporation
(A) 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 (B) was terminated under § 1362(d)(2) or (3), (2) the Secretary
determines that the circumstances resulting in the ineffectiveness or termination were
inadvertent, (3) no later than a reasonable period of time after discovery of the
circumstances resulting in the ineffectiveness or termination, steps were taken (A) so
that the corporation is a small business corporation or (B) to acquire the shareholder
consents, 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 ineffectiveness or termination, the
corporation will be treated as an S corporation during the period specified by the
Secretary.

       Based solely on the facts submitted and the representations made, we conclude
that X’s S corporation election terminated on Date10 as the result of the failure of the
trustees of Trust2, Trust3 and Trust4 to make elections under § 1362(1) to treat Trust2,
Trust3 and Trust4 as ESBTs effective as of that date. We further conclude that the
termination of X’s S corporation election on Date10 was inadvertent within the meaning
of § 1362(f). We further hold that, pursuant to the provisions of § 1362(f), X will be
treated as continuing to be an S corporation from Date10 and thereafter, provided that
X’s S corporation election was valid and provided that the election was not otherwise
terminated under § 1362(d).

       This ruling is contingent upon the trustees of Trust2, Trust3 and Trust4 filing an
ESBT election on behalf of Trust2, Trust3 and Trust4, respectively, with an effective
date of Date10. These elections must be filed with the appropriate service center within
120 days of the date of this ruling. A copy of this letter should be attached to each
election.

       If the above condition is not met, then this letter ruling is null and void.
Furthermore, if this condition is not met, X must send a notification that its S election
has terminated to the service center with which X’s S election was filed.

       RULING 2

       Section 1361(b)(3)(A) of the Internal Revenue Code (Code) provides that a QSub
shall not be treated as a separate corporation, and all assets, liabilities, and items of
PLR-128092-17                                5

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 QSub.

      Section 1.1361-3(a) of the Income Tax Regulations prescribes the time and
manner for making an election to be classified as a QSub. Section 1.1361-3(a)(4)
provides that an election to treat an eligible subsidiary as a QSub may be effective up to
two months and 15 days prior to the date the election is filed or not more than 12
months after the election is filed. The proper form for making the election is Form 8869.

       Section 1.1361-3(a)(6) provides that an extension of time to make a QSub
election may be available under procedures applicable under §§ 301.9100-1 and
301.9100-3.

       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) provides that the term
“regulatory election” includes an election whose due date is prescribed by a regulation
published in the Federal Register.

       Sections 301.9100-1 through 301.9100-3 provide the standards the
Commissioner will use to determine whether to grant an extension of time to make the
election. 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 the evidence (including affidavits described in § 301.9100-3(e)) to establish to
the satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good
faith, and (2) the grant of relief will not prejudice the interests of the Government.

      Based solely upon the information submitted and the representations made, we
conclude that the requirements of § 301.9100 have been satisfied. X is granted an
extension of time of 120 days from the date of this letter to file Forms 8869, Qualified
Subchapter S Subsidiary Election, with the appropriate service center to elect to treat Y
as a QSub effective Date3. A copy of this letter should be attached to the Form 8869.

      All of the rulings contained above are contingent upon X filing, as necessary or
appropriate, amended federal tax returns consistent with the treatment of X as an S
PLR-128092-17                                6

corporation, Y as a QSub, and Trust2, Trust3 and Trust4 as ESBTs, for all applicable
tax years, within 120 days of the date of this letter. A copy of this letter should be
attached to any such returns.

       Except as specifically set forth above, no opinion is expressed concerning the
federal tax consequences of the facts described above under any other provision of the
Code. Specifically, no opinion is expressed regarding X’s eligibility to be an S
corporation. In addition, no opinion is expressed as to whether Y is eligible to elect to
be treated as a QSub. Finally, no opinion is expressed as to whether Trust2, Trust3
and Trust4 are eligible to elect to be treated as ESBTs.

       This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
of the Code provides that it may not be used or cited as precedent.

      The rulings contained in this letter are 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 request for rulings, it is subject to verification on
examination.

      In accordance with the power of attorney on file with this office, we are sending
copies of this letter to X’s authorized representatives.

                                      Sincerely,



                                      Bradford R. Poston
                                      Special Counsel
                                      Office of Associate Chief Counsel
                                      (Passthroughs & Special Industries)


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