S corporation election saved after a trust beneficiary forgot to sign the Form 2553

Plain-English summary

A corporation had filed a Form 2553 to be taxed as an S corporation, and one
of its shareholders was a trust. To keep an S corporation's tax status, a trust
shareholder generally has to qualify as a qualified subchapter S trust (QSST),
and the trust's income beneficiary must personally sign both the S election
consent and the separate QSST election. Here the beneficiary never signed
either one, so the S election was technically invalid from day one. The company
represented that the mistake was inadvertent and that everyone had filed their
tax returns for years as if the S election and the QSST were valid. The IRS
agreed the failure was inadvertent under Section 1362(f) and let the S
corporation status stand, so long as the beneficiary now files the missing QSST
election and consent within 120 days. This is routine relief that spares a small
business from a costly, unintended loss of its passthrough tax treatment.

Ruling snapshot

• Question: Was the invalid S corporation election, caused by the trust
  beneficiary's failure to sign the Form 2553, an inadvertent failure eligible
  for relief under Section 1362(f)?
• Outcome: Approved (relief granted, subject to the beneficiary filing the
  QSST election and consent within 120 days)
• Key authorities: IRC §§ 1361(d), 1362(a), 1362(f); Treas. Reg.
  §§ 1.1361-1(j)(6)(ii), 1.1362-6(b)

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202210002                                              Third Party Communication: None
 Release Date: 3/11/2022                                        Date of Communication: Not Applicable
 Index Number: 1361.03-02, 1362.00-00,
               1362.01-01, 1362.04-00                           Person To Contact:
                                                                -----------------, ID No. -----------------
 ------------------------------------------------------------   Telephone Number:
 -------------                                                  --------------------
 --------------------------------------------------------       Refer Reply To:
 --------------------------                                     CC:PSI:01
 ----------------------------                                   PLR-106496-21
 ------------------------------------------------------------   Date:
                                                                December 16, 2021




                                                     Legend

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

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

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

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

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

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

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


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

This responds to a letter dated March 15, 2021, submitted on behalf of X, by X's
authorized representative, requesting relief under section 1362(f) of the Internal
Revenue Code.
PLR-106496-21                                 2


                                           Facts

You have represented that the facts are as follows. X is a corporation which is the
successor of another corporation, Y, which was organized under the laws of State on
Date 1. Y filed a Form 2553, Election of a Small Business Corporation, electing to be
taxed as an S corporation, effective on Date 2. It is represented that, as of Date 2 (and
at all times thereafter), Trust satisfied the qualified subchapter S trust ("QSST")
requirements under section 1361(d)(3). However, the income beneficiary, A, of the
Trust did not properly sign the Form 2553, both for electing to be an S corporation and
for electing to be a QSST. Because the Form 2553 was not properly signed, Y's S
corporation election was ineffective and the QSST election of Trust was not valid.

X represents that the error and the invalidity of Y's S corporation election were
inadvertent. X also represents that, since Date 2, Y and Y's shareholders, and X and
X's shareholders, have filed tax returns consistent with Y and X being S corporations
and Trust being a QSST. In addition, X and its shareholders (including the
shareholders of predecessor Y), agree to make such adjustments, consistent with the
treatment of X and Y as S corporations and Trust as a QSST, as may be required by
the Secretary.

                                            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
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
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 for purposes of § 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 § 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(d)(1) provides, in part, that in the case of a QSST with respect to 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 such
PLR-106496-21                                 3

trust shall be treated as the owner of that portion of the trust which 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) apply. Section 1361(d)(2)(D) provides that an election under § 1362(d)(2)
shall be effective up to 15 days and 2 months before the date of the election.

Section 1361(d)(3) provides that the term "qualified subchapter S trust" 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 income 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
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 § 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 1.1361-1(j)(6)(ii) of the Income Tax Regulations provides that the current
income beneficiary of the trust must make the QSST election under § 1361(d)(2) by
signing and filing with the service center with which the corporation files its income tax
return the applicable form or statement including the information listed in § 1.1361-
1(j)(6)(ii).

Section 1362(a) provides that, except as provided in § 1362(g), a small business
corporation may elect, in accordance with the provisions of § 1362, to be an S
corporation.

Section 1362(a)(2) provides that an election to be an S corporation will only be valid if
all persons who are shareholders on the day on which such election is made consent to
such election.

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated
whenever (at any time on or after the first day of the taxable year for which the
corporation is an S corporation) the corporation ceases to be a small business
corporation.

Section 1362(f) provides, in part, that if (1) an election under § 1362(a) by any
corporation was not effective for the taxable year for which it was 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, (2) the Secretary determines that the
circumstances resulting in such ineffectiveness were inadvertent, (3) no later than a
reasonable period of time after discovery of the event resulting in the ineffectiveness,
steps were taken (A) so that the corporation for which the election was made is a small
business corporation, or (B) to acquire the required shareholder consents, and (4) the
PLR-106496-21                                 4

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 such ineffectiveness, the corporation shall be treated as an S
corporation during the period specified by the Secretary.

Section 1.1362-6(b)(1) provides, in part, that except as provided in § 1.1362-6(b)(3)(iii),
the election of the corporation is not valid if any required consent is not filed in
accordance with the rules contained in § 1.1362-6(b).

Section 1.1362-6(b)(2)(iv) provides that in the case of a trust described in
§ 1361(c)(2)(A) (including a trust under § 1361(d)(1)(A) as a trust described in
§ 1361(c)(2)(A)(i)), only the person treated as the shareholder for purposes of
§ 1361(b)(1) must consent to the election.

                                        Conclusion

Based solely on the facts submitted and the representations made, we conclude that
Y's S corporation election was ineffective on Date 2 due to the failure to obtain the
consent of A, the income beneficiary of Trust, to the S corporation election, and the
failure of A, the income beneficiary of Trust, to sign the QSST election for Trust. The
circumstances resulting in such ineffectiveness were inadvertent within the meaning of
§ 1362(f). Pursuant to the provisions of § 1362(f), Y will continue to be treated as an S
corporation on and after Date 2, until its termination on Date 4, unless the S corporation
election is otherwise terminated under § 1362(d), and Trust will be treated as a QSST
(assuming that it otherwise qualifies as a QSST), provided that the following conditions
are met.

This ruling is conditioned on A, the income beneficiary of Trust, filing a QSST election,
effective Date 2, with the appropriate service center within 120 days of the date of this
letter. In addition, as a condition to this ruling, A must sign a written statement as
described in § 1.1362-6(b)(1) consenting to Y's S corporation election effective Date 2.
The written statement must be filed with the appropriate service center within 120 days
from the date of this letter, indicating that the statement is to be associated with Y's
originally filed Form 2553. A copy of this letter should be attached to the new Form
2553 and the consent statement.

The shareholders of X and Y must include in income their pro rata share of the
separately stated and nonseparately computed items of X and Y as provided in § 1366,
make any adjustments to basis as provided in § 1367, and take into account any
distributions made by X and Y as provided in § 1368. If X and Y or its shareholders fail
to treat X and Y as described above, this letter ruling will be null and void.
PLR-106496-21                                5

Except as expressly provided herein, we express or imply no opinion concerning the tax
consequences of any aspect of any transaction or item discussed or referenced in this
letter. Specifically, we express or imply no opinion as to whether X or Y is or was
otherwise a valid S corporation for federal tax purposes, and whether Trust was 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 an accompanied by a penalty of perjury statement executed
by the appropriate party. While this office has not verified any of the material submitted
in support of the ruling request, it is subject to verification or examination.

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

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


                                      Sincerely,


                                      /s/
                                      _________________________
                                      Caroline E. Hay
                                      Senior Counsel, Branch 1
                                      Office of the Associate Chief Counsel
                                      (Passthroughs and Special Industries)


Enclosure:
      Copy for § 6110 purposes



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