A voting trust is a permissible S corporation shareholder

Plain-English summary

An S corporation is limited in who can own its stock; certain trusts qualify, but the wrong kind of shareholder can blow the S election. Here the shares were held by an electing small business trust (ESBT), a permitted shareholder. The trustee wanted to move the shares into a new voting trust so the stock could be voted as a single block, a precaution in case the ESBT later splits into separate shares. The trustee asked the IRS to confirm this would not disqualify the S corporation. The IRS ruled that a voting trust is itself a permissible S corporation shareholder under § 1361(c)(2)(A)(iv), and that after the transfer each potential current beneficiary of the original ESBT will continue to be treated as a shareholder, so the ownership stays within the allowed classes. Notably, the IRS expressed no opinion on whether the company actually qualified as an S corporation or whether the ESBT was properly an ESBT. Owners restructuring how S corporation shares are held or voted would care: routing stock through a voting trust does not by itself break the S election.

Ruling snapshot

• Question: Is a voting trust a permissible S corporation shareholder, and do the ESBT's beneficiaries remain shareholders after the shares move into it?
• Outcome: approved (voting trust is a permissible shareholder; beneficiaries continue as shareholders)
• Key authorities: IRC § 1361(c)(2)(A)(iv) and (B)(iv) (voting trusts); IRC § 1361(c)(2)(A)(v) and (B)(v) (ESBTs)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201837012                                              Third Party Communication: None
Release Date: 9/14/2018                                        Date of Communication: Not Applicable
Index Number: 1361.01-00, 1361.03-00,
              1361.03-03                                       Person To Contact:
                                                               [redacted], ID No. [redacted]
[redacted]   Telephone Number:
[redacted]                                         [redacted]
[redacted]                                   Refer Reply To:
[redacted]                                           CC:PSI:01
[redacted]                  PLR-137411-17
[redacted]                Date:
                                                               June 11, 2018




LEGEND

Company = [redacted]
[redacted]

Date 1       =    [redacted]

Date 2       =    [redacted]

State       =     [redacted]

Trustee      = [redacted]

Trust 1      = [redacted]

A            = [redacted]

Trust 2      = [redacted]




Dear [redacted],

This letter responds to a letter dated December 12, 2017, submitted on behalf of
Company, requesting relief under § 1361 of the Internal Revenue Code.


                                         FACTS

The information submitted states that Company was incorporated in State on Date 1
and elected to be an S corporation effective Date 2.

Trustee is the sole trustee of Trust 1, which is an Electing Small Business Trust (ESBT)
as defined in section 1361(e)(1). Trust 1 holds A shares of voting stock in Company.
Trust 1 is a permissible S corporation shareholder under § 1361(c)(2)(A)(v). Under
§ 1361(c)(2)(B)(v), the potential current beneficiaries of Trust 1 are treated as the
shareholders of the S corporation, Company.

Trustee of Trust 1 intends to transfer its shares of Company from Trust 1 to a new trust,
Trust 2, a voting trust. Trust 2 will be governed pursuant to a Voting Trust Agreement,
which will be entered into by Trustee in his capacity as trustee for both Trust 1 and Trust
2, as well as Company. Trust 2 will provide a mechanism to coordinate the voting of
shares of Company into a single block. This is a measure taken in case Trust 1 divides
into separate shares in the future.

                                           LAW

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(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)(B) provides that a "small business corporation" means a domestic
corporation that is not an ineligible corporation and that does not 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.

Section 1361(c)(2)(A)(i) provides that for purposes of section 1361(b)(1)(B), a trust may
be a shareholder if all of it 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.
Section 1361(c)(2)(B)(i) provides that for purposes of section 1361(b)(1), in the case of
a trust described in section 1361(c)(2)(A)(i), the deemed owner shall be treated as the
shareholder.

Section 1361(c)(2)(A)(iv) provides that a trust created primarily to exercise the voting
power of stock transferred to it may be a shareholder. Section 1361(c)(2)(B)(iv) provides
that in the case of a trust described in § 1361(c)(2)(A)(iv), each beneficiary of the trust
shall be treated as a shareholder.


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

Section 1361(c)(2)(B)(v) provides that for purposes of § 1361(b)(1)(B), each potential
current beneficiary of an ESBT shall be treated as a shareholder; except that, if for any
period there is no potential current beneficiary of the ESBT, the ESBT shall be treated
as the shareholder during such period.

Section 1361(e) provides that an ESBT means any trust if (i) such trust does not have
as a beneficiary any person other than (I) an individual, (II) an estate, (III) an
organization described in § 170(c)(1) which holds a contingent interest in such trust and
is not a potential current beneficiary, (ii) no interest in such trust was acquired by
purchase, and (iii) an election under § 1361(e) applies to such trust.

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.

                                     CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that
Trust 2, a voting trust, is a permissible shareholder of Company pursuant to section
1361(c)(2)(A)(iv). Additionally, following the transfer of shares of Company from Trust 1
to Trust 2, each potential current beneficiary of Trust 1 will continue to be treated as a
shareholder of Company for purposes of section 1361(b)(1), pursuant to section
1361(c)(2)(B)(iv) and section 1361(c)(2)(B)(v).

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 Company's eligibility to be
an S corporation or whether Trust 1 was or is otherwise eligible to be an ESBT.

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.

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 Company's authorized representatives.


                                      Sincerely,

                                      Joy C. Spies

                                      Joy C. Spies
                                      Senior Technician Reviewer
                                      (Passthroughs & Special Industries)




cc: