Inadvertent S corporation termination relief granted for eight late QSST elections

Plain-English summary

Eight trusts received stock in an S corporation, but their beneficiaries did not timely make qualified subchapter S trust elections. The resulting ineligible shareholders terminated the corporation's S election. The IRS found the termination inadvertent based on representations that the trusts otherwise qualified, the failure was not tax-motivated, and the corporation and shareholders would make required adjustments. The corporation would continue to be treated as an S corporation if its election was otherwise valid and not otherwise terminated. The relief required the beneficiaries to file QSST elections effective on the original transfer date and required the trusts and beneficiaries to amend specified returns within 120 days or before the limitations period expired, whichever came first.

Ruling snapshot

• Question: May the corporation retain S status after eight beneficiaries failed to file timely QSST elections?
• Outcome: approved
• Key authorities: IRC §§ 1361(d) and 1362(f)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202009001                                              Third Party Communication: None
Release Date: 2/28/2020                                        Date of Communication: Not Applicable
Index Number: 1361.03-02, 1362.02-00,
              1362.02-02, 1362.04-00                           Person To Contact:
                                                               --------------, ID No. -----------------
---------------------------------------------------            Telephone Number:
----------------------------------                             --------------------
-----------------------------------                            Refer Reply To:
                                                               CC:PSI:B01
                                                               PLR-101402-19
                                                               Date:
                                                               August 07, 2019


LEGEND



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

Trust 2           =         -------------------------------------------------------
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Trust 3           =         -------------------------------------------------------
                           --------------------------

Trust 4           =         ----------------------------------------------------
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Trust 5           =         -------------------------------------------------------
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Trust 6           =         ----------------------------------------------------------
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Trust 7           =         ----------------------------------------------------------
----------------------------------------------------

Trust 8           =         -------------------------------------------------------
----------------------------------------------------

Date 1            =        --------------------------
PLR-101402-19                                        2


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

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

Years           =       --------------------

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



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

This responds to a letter dated December 14, 2018, submitted on behalf of X by X’s
authorized representative, and supplemental correspondence, requesting a ruling under
§ 1362(f) of the Internal Revenue Code.

FACTS

According to the information submitted, 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, shares in X were transferred to Trust 1 Trust 2, Trust 3, Trust 4, Trust 5,
Trust 6, Trust 7, and Trust 8. The beneficiaries of Trust 1 Trust 2, Trust 3, Trust 4, Trust
5, Trust 6, Trust 7, and Trust 8 failed to make timely qualified subchapter S trust (QSST)
elections. Thus, X’s S corporation election terminated on Date 3.

X represents that Trust 1 Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust 7, and Trust 8
qualified to elect to be QSSTs under § 1361(d) as of Date 3 and thereafter. X further
represents that the circumstances resulting in the failure to file a QSST election for
Trust 1 Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust 7, and Trust 8 were inadvertent
and 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) 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
PLR-101402-19                                  3

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) 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 part, 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 consisting of S corporation stock with respect to which the election
under § 1361(d)(2) applies. Under § 1361(d)(2)(A), a beneficiary of a QSST may elect
to have § 1361(d) apply. Under § 1361(d)(2)(D), this election will be effective up to 15
days and two months before the date of the election.

Section 1361(d)(3) provides that for purposes of § 1361(d), the term QSST means a
trust (A) the terms of which require that – (i) during the life of the current income
beneficiary, there shall be only 1 income beneficiary of the trust; (ii) any corpus
distributed during the life of the current beneficiary may be distributed only to such
beneficiary; (iii) the income interest of the current income beneficiary in the trust shall
terminate on the earlier of such 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 (within
the meaning of § 643(b)) of which is distributed (or required to be distributed) currently
to 1 individual who is a citizen or resident of the United States.

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 1362(f) provides, in relevant part, that if (1) an election under § 1362(a) by any
corporation was terminated under § 1362(d)(2) or (3) or § 1361(b)(3)(C); (2) the
Secretary determines that the circumstances resulting in the termination were
inadvertent; (3) no later than a reasonable period of time after discovery of the
circumstances resulting in the 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 the termination, such corporation shall be
treated as an S corporation during the period specified by the Secretary.

CONCLUSION
PLR-101402-19                                  4


Based solely on the facts submitted and the representations made, we conclude that
X’s S corporation election terminated on Date 3 as a result of the failure to make a
timely QSST election for Trust 1 Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust 7, and
Trust 8. We further conclude that the termination of X’s S election on Date 3 was
inadvertent within the meaning of § 1362(f). Pursuant to the provisions of § 1362(f), X
will be treated as continuing to be an S corporation as of Date 3 and thereafter,
provided that X's S corporation election was otherwise valid and is not otherwise
terminated under § 1362(d), and provided that (1) within 120 days from the date of this
letter, the beneficiaries of Trust 1 Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust 7, and
Trust 8 file QSST elections for Trust 1 Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust ,
7, and Trust 8 with an effective date of Date 3, with the appropriate service center; and
(2) within 120 days from the date of this letter, or prior to the expiration of the applicable
statute of limitations, whichever is sooner, Trust 1, Trust 2, Trust 3, Trust 4, Trust 5,
Trust 6, Trust 7, and Trust 8, and each of their beneficiaries, amend their tax returns for
Years consistent with the relief granted in this ruling. If these conditions are not
satisfied, this ruling is null and void. A copy of this letter must be attached to the QSST
elections.

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.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalties 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.
PLR-101402-19                                5


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

                                      Sincerely,


                                      Joy C. Spies
                                      Joy C. Spies
                                      Senior Technician Reviewer, 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


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