Missed QSST election does not end S corporation status

Plain-English summary

Shares of an S corporation were transferred to a trust that was eligible to be a qualified subchapter S trust, but the trust beneficiaries did not timely make the required QSST election. That omission technically terminated the corporation's S election on the transfer date. The corporation continued filing as an S corporation and represented that it had relied on its accounting firm to make the trust election. The IRS found the termination inadvertent and treated the corporation as continuously maintaining S status. The relief is conditioned on the trust beneficiary filing a QSST election effective from the transfer date within 120 days, with a copy of the ruling attached.

Ruling snapshot

• Question: Can an S corporation preserve continuous S status after a trust beneficiary inadvertently misses the QSST election?
• Outcome: Approved, if the beneficiary files the retroactive QSST election within 120 days
• Key authorities: IRC §§ 1361(c), 1361(d), 1362(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: 202315002                                            Third Party Communication: None
 Release Date: 4/14/2023                                      Date of Communication: Not Applicable
 Index Number: 1362.00-00, 1362.04-00
                                                              Person To Contact:
 -----------------------------                                ----------------------, ID No. -----------------
 ---------------------------------------                      Telephone Number:
 --------------------------------                             --------------------
 ----------------------                                       Refer Reply To:
 -------------------------------                              CC:PSI:B01
                                                              PLR-113722-22
                                                              Date:
                                                              January 13, 2023




Legend

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

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

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

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

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

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

 Year 1       = -------


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

This responds to a letter dated February 8, 2022, and subsequent correspondence,
submitted on behalf of X by its authorized representatives, requesting a ruling under §
1362(f) of the Internal Revenue Code.

Facts

The information submitted states that X was incorporated under the laws of State on
Date 1. X elected to be an S corporation effective on Date 2. On Date 3, shares of X
were transferred to Trust.
PLR-113722-22                                 2

X represents that Trust was eligible to elect qualified subchapter S trust (QSST)
treatment under § 1361(d). However, the beneficiaries of Trust failed to timely make a
QSST election. Therefore, X's S election terminated on Date 3.

X represents that it has filed consistently with the treatment as an S corporation since
Date 3. X represents that it relied upon its accounting firm to make the QSST election
and that the failure to make the QSST election was unintentional.

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 an S corporation
shareholder.

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) 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 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 §
PLR-113722-22                                3

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 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 3, because of the inadvertent failure of the
beneficiary of Trust to make a QSST election, and that this termination of X's S 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 3 and thereafter, provided X's S corporation election was valid and not otherwise
terminated under § 1362(d).

This ruling is contingent upon the beneficiary of Trust filing a QSST election, with an
effective date of Date 3, 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 the
conditions are not met, this ruling is 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.
PLR-113722-22                                4

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 representatives.

                                      Sincerely,

                                      Holly Porter
                                      Associate Chief Counsel
                                      (Passthroughs & Special Industries)



                               by:    _______________________________
                                      Laura C. Fields
                                      Branch Chief, Branch 1
                                      Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)

Enclosure
      Copy of this letter for section 6110 purposes



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