Missed trust election does not invalidate S status

Plain-English summary

A trust owned stock in a corporation when the corporation's S election became effective, but the trust beneficiary did not file the required qualified subchapter S trust election. The trust was therefore an ineligible shareholder and the corporation's S election was technically invalid from the start. The corporation represented that the omission involved no tax avoidance or retroactive tax planning and agreed with its shareholders to make any required consistent adjustments. The IRS found the invalidity inadvertent and treated the corporation as an S corporation from the intended effective date onward. Relief is contingent on the beneficiary filing the retroactive QSST election within 120 days, or the ruling is null and void.

Ruling snapshot

• Question: Could the corporation retain S status after a shareholder trust's beneficiary failed to file a QSST election?
• Outcome: Approved, subject to a retroactive QSST election within 120 days
• Key authorities: IRC §§ 1361(c), 1361(d), 1362(a), 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: 202345001                                    Third Party Communication: None
 Release Date: 11/10/2023                             Date of Communication: Not Applicable
 Index Number: 1361.00-00, 1361.01-00,
               1361.03-00, 1361.03-02,                Person To Contact:
               1362.00-00, 1362.02-00,                ----------------------, ID No. -----------------
               1362.04-00                             Telephone Number:
                                                      -------------------
 -------------------------                            Refer Reply To:
 --------------------------------------------------   CC:PSI:B3
 -------------------------                            PLR-101855-23
 ----------------                                     Date:
 -----------------------------------------            July 26, 2023
 -------------------------



                          Legend

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

 State      = --------

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

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

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




Dear ----------------------


This letter responds to a letter dated December 15, 2022, submitted on behalf of X by
its authorized representative, requesting a ruling under § 1362(f) of the Internal
Revenue Code (Code).

PLR-101855-23                                 2

                                           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 Date 2. On Date 2, Trust was a
shareholder in X. X represents that Trust was eligible to be a qualified subchapter S
trust (QSST) under § 1361(d)(3), however, the QSST election for Trust, with an effective
date of Date 2, was not filed. Consequently, Trust was an ineligible shareholder, and,
as a result, X’s S corporation election was invalid.

        X represents that there was no tax avoidance or retroactive tax planning involved
in the failure of Trust to make a valid QSST election. X and its shareholders agree to
make any adjustments consistent with the treatment of X as an S corporation and Trust
as an eligible shareholder, 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)(B) provides that the term “small business corporation” means
a domestic corporation that is not an ineligible corporation and that does not, among
other requirements, 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 of the Code)
as owned by an individual who is a citizen or resident of the United States may be a
shareholder.

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

        Section 1361(d)(1) provides 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
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)(1)
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.

PLR-101855-23                                 3


        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 only be 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 a 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 a 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 including the information listed in § 1.1361-1(j)(6)(ii).

      Section 1362(a)(1) 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(f) provides that if (1) an election under § 1362(a) or
§ 1361(b)(3)(B)(ii) by any corporation (i) 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 (ii) was terminated
under § 1362(d)(2) or (3) or § 1361(b)(3)(C); (2) the Secretary determines that the
circumstances resulting in such ineffectiveness or termination were inadvertent; (3) no
later than a reasonable period of time after discovery of the circumstances resulting in
such ineffectiveness or termination, steps were taken so that the corporation for which
the election was made or the termination occurred is a small business corporation or a
QSub, as the case may be, or to acquire the required shareholder consents; and (4) the
corporation for which the election was made or the termination occurred, and each
person who was a shareholder of the corporation at any time during the period specified
pursuant to § 1362(f), agree to make the adjustments (consistent with the treatment of
the corporation as an S corporation or a QSub, as the case may be) as may be required
by the Secretary with respect to this period, then, notwithstanding the circumstances
resulting in such ineffectiveness or termination, the corporation shall be treated as an S
corporation or a QSub, as the case may be, during the period specified by the
Secretary.

PLR-101855-23                                4

                                        Conclusion

       Based solely on the facts submitted and representations made, we conclude that
X’s S corporation election was invalid on Date 2, as Trust was an ineligible shareholder,
and that the invalidity of X’s S corporation election was inadvertent within the meaning
of § 1362(f). Consequently, we rule that X will be treated as an S corporation from Date
2, and thereafter, provided that X’s S corporation election is otherwise valid and not
otherwise terminated under § 1362(d).

        These rulings are contingent on the beneficiary of Trust filing an QSST election
effective Date 2, with the appropriate service center within 120 days of the date of this
letter. A copy of this letter should be attached to the QSST election. If the above
conditions are not met, then this ruling is null and void.

       Except as specifically ruled above, we express or imply no opinion concerning
the federal tax consequences of the facts described above under any other provision of
the Code, including whether X is otherwise a valid S corporation under § 1361(b), or
whether Trust is a QSST within the meaning of § 1361(d)(3).

      The rulings contained in this letter are 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 rulings requested, it is subject to verification on
examination.

       Pursuant to a power of attorney on file, we are sending a copy of this letter to X’s
authorized representative.

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



                                      Sincerely,

                                      Richard T. Probst
                                      Senior Technician Reviewer, Branch 3
                                      Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)



Enclosure:
      Copy for § 6110 purposes

PLR-101855-23   5


cc:--