Grants inadvertent S corporation termination relief for late QSST election

Plain-English summary

An S corporation shareholder died, and the shareholder's estate transferred stock to a trust under the will. The trust was an eligible shareholder for two years and met the substantive requirements for a qualified subchapter S trust, but its beneficiary failed to file the QSST election on time. That failure terminated the corporation's S election. The IRS found the termination inadvertent and allowed the corporation to be treated continuously as an S corporation, provided the original election was otherwise valid. Relief was conditioned on the beneficiary filing a QSST election effective on the termination date within 120 days.

Ruling snapshot

• Question: Could an S corporation receive inadvertent-termination relief after a trust beneficiary missed the QSST election deadline?
• Outcome: Approved, conditioned on filing the QSST election 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: 201833016
Third Party Communication: None
Release Date: 8/17/2018
Date of Communication: Not Applicable
Index Numbers: 1362.00-00, 1362.04-00
Person To Contact:
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------------------------------------------ Refer Reply To:
CC:PSI:B03
PLR-136686-17
Date:
May 09, 2018

LEGEND

X = -----------------------
------------------
-
A = -------------------------

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

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

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

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

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

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

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

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

This letter responds to a letter dated December 7, 2017, and subsequent correspondence, submitted on behalf of X requesting inadvertent termination relief pursuant to § 1362(f) of the Internal Revenue Code (“Code”).

FACTS

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

On Date 3, A, a shareholder of X, died. On Date 4, A’s estate transferred shares of X to Trust pursuant to the terms of A’s will. Trust qualified under § 1361(c)(2)(A)(iii) as an eligible S corporation shareholder for a two-year period beginning on the day X stock was transferred to it. X represents that Trust has, at all times since the transfer of X stock to Trust, met the requirements of a qualified subchapter S trust (QSST), within the meaning of § 1361(d)(3). However, the beneficiary of Trust failed to timely file an election under § 1361(d)(2) for Trust to be a QSST.

X represents that the failure to file the QSST election for Trust and the resulting termination of X’s S corporation election was not motivated by tax avoidance or retroactive tax planning. X and its shareholders have agreed to make any adjustments consistent with the treatment of X as an S corporation as may be required by the Commissioner with respect to the period specified by § 1362(f).

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 § 1362(a) is in effect for such year.

Section 1361(b)(1) defines a “small business corporation” as a domestic corporation that is not an ineligible corporation and that 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(c)(2)(A)(i) provides that 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(c)(2)(A)(iii) provides that, for purposes of § 1361(b)(1)(B), a trust with respect to stock transferred to it pursuant to the terms of a will is a permitted shareholder, but only for the 2-year period beginning on the day on which such stock is transferred to it.

Section 1361(d)(1) provides that a QSST whose beneficiary makes an election under § 1361(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 § 1362(d)(2) applies.

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Section 1361(d)(2)(A) provides that a beneficiary of a QSST (or his legal representative) may elect to have § 1361(d) apply. Section 1361(d)(2)(D) provides that an election under § 1361(d)(2) shall be effective up to 15 days and 2 months before the date of the election.

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 (with 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 1.1361-1(j)(6)(ii) of the Income Tax Regulations, provides that the current income beneficiary of the trust must make the election by signing and filing with the service center with which the corporation files its income tax the applicable form or a statement including the information listed in § 1.1361-1(j)(6)(ii).

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated whenever the corporation ceases to be a small business corporation.

Section 1362(f) provides, in relevant part, that if (1) an election under § 1362(a) by any corporation was terminated under paragraph (2) or (3) of § 1362(d), (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 termination, 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 termination, the corporation will be treated as continuing to be 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 was terminated on Date 5 and that the termination was inadvertent within the meaning of § 1362(f). Consequently, we rule that X will be treated as an S corporation from Date 5 and thereafter provided that X’s S corporation election was otherwise valid and not otherwise terminated under § 1362(d).

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This ruling is contingent on the beneficiary of Trust filing a QSST election for Trust effective Date 5 with the appropriate service center within 120 days of the date of this letter. A copy of this letter should be attached to the QSST election.

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 Trust is a valid QSST.

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 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.

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

Sincerely,

James A. Quinn
Senior Counsel, Branch 3
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures: Copy of this letter
Copy of this letter for § 6110 purposes

cc: