Late QSST election receives inadvertent S corporation termination relief

Plain-English summary

An S corporation shareholder sold some shares to a trust that represented it met the qualified subchapter S trust (QSST) requirements. The trust's sole income beneficiary failed to timely make the QSST election, causing the corporation's S election to terminate when the trust acquired the shares. The corporation and affected parties reported consistently with S corporation and QSST treatment and represented that the missed filing was inadvertent, not tax-motivated. The IRS granted relief under IRC § 1362(f), treating the corporation as continuously eligible for S status from the termination date. Relief was conditioned on the beneficiary filing the QSST election with the original effective date within 120 days.

Ruling snapshot

• Question: Can the corporation retain continuous S status after a trust beneficiary inadvertently failed to file a timely QSST election?
• 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: 202110009                                                 Third Party Communication: None
 Release Date: 3/12/2021                                           Date of Communication: Not Applicable
 Index Number: 1362.00-00, 1362.01-00,
               1362.01-01, 1362.04-00                              Person To Contact:
                                                                   -----------------------, ID No. -----------------
 ---------------------------------------                           Telephone Number:
 -------------------------------------------                       ----------------------
 -----------------------------                                     Refer Reply To:
 ------------------------                                          CC:PSI:03
                                                                   PLR-114535-20
                                                                   Date:
                                                                   December 04, 2020




Legend

X                          =         ----------------------------------------
-----------------------------------------------------------

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

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

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

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

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

State                      =        --------

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

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

a                          =        -----


Dear -------------------:
PLR-114535-20                                 2


This letter responds to a letter dated June 23, 2020, and subsequent correspondence,
submitted on behalf of X by its authorized representative requesting a ruling under
§1362(f) of the Internal Revenue Code (Code).

                                           Facts

The information submitted states that X was incorporated under the laws of State on
Date 1 and elected to be an S corporation effective Date 1. On Date 2, D sold a shares
of X to Trust. Since Date 2, X’s shareholders are A, B, C, and Trust.

X represents that Trust satisfied the qualified subchapter S trust (QSST) requirements
under §1361(d)(3). However, D, Trust’s sole income beneficiary, inadvertently failed to
timely make a QSST election under §1361(d)(2) with respect to Trust.

X represents that the respective failure to file a QSST election was inadvertent and not
motivated by tax avoidance or retroactive tax planning. X also represents that from
Date 2, X and its shareholders have filed all returns consistent with X’s status as an S
corporation. Further, X and D represent that X, Trust, and D have filed all returns
consistent with the treatment of Trust as a QSST. 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) of the Code 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 the term “small business corporation” means a
domestic corporation which is not an ineligible corporation and which 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 § 1361(b)(1)(B), 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 a shareholder of an S
corporation.

Section 1361(d)(1) provides that in the case of a QSST for which a beneficiary makes
an election under §1361(d)(2), the trust is treated as a trust described in
§1361(c)(2)(A)(i), and for purposes of §678(a), the beneficiary of the trust shall be
treated as the owner of that portion of the trust that consists of stock in an S corporation
with respect to which the election under §1361(d)(2) is made.

Section 1361(d)(2)(A) provides that a beneficiary of a QSST may elect to have §1361(d)
PLR-114535-20                                  3

apply. Section 1.1361-1(j)(6)(ii) provides that the current income beneficiary of a QSST
must make the election under §1361(d)(2) by signing and filing with the service center
with which the corporation files its income tax returns the applicable form or a statement
including the information listed in §1.1361-1(j)(6)(ii).

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 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 such
beneficiary, and (B) all of the income (within the meaning of section 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 1362(d)(2) provides that (A) in general, an election under §1362(a) shall be
terminated whenever (at any time on or after the first day of the first taxable year for
which the corporation is an S corporation) such corporation ceases to be a small
business corporation, and (B) any termination under §1362(d)(2) shall be effective on
and after the date of cessation.

Section 1362(f) provides, in part, that if (1) an election under §1362(a) by any
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 required 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.

                                         Conclusion

Based solely on the facts submitted and the representations made, we conclude that
X’s S corporation election terminated on Date 2, because of D’s failure, as the
beneficiary of Trust to make a QSST election with respect to Trust effective Date2. We
further conclude that this termination of X’s S corporation election was an inadvertent
termination within the meaning of §1362(f). Accordingly, pursuant to the provisions of
§1362(f), X will be treated as continuing to be an S corporation from Date 2 and
PLR-114535-20                                   4

thereafter, provided X’s S corporation election was valid and not otherwise terminated
under §1362(d).

This ruling is contingent upon D, as the beneficiary of Trust, filing a QSST election for
Trust with an effective date of Date 2 with the appropriate service center within 120
days of the date of this ruling. A copy of this letter should be attached to the QSST
election. If X or its shareholders fail to treat X as described above, this letter ruling will
be null and void.

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,
including whether X is a small business corporation under §1361(b), or whether Trust is
a QSST within the meaning of §1361(d)(3).

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.

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

Pursuant to a power of attorney on file, a copy of this letter is being sent to X’s
authorized representative.

                                        Sincerely,


                                        ______________________________
                                        Wendy L. Kribell
                                        Senior Counsel, Branch 3
                                        Office of Associate Chief Counsel
                                        (Passthroughs & Special Industries)


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



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