Corporation received relief for an inadvertent S election termination

Plain-English summary

Two trusts acquired stock in an S corporation but their trustee failed to make timely electing small business trust elections. Because the trusts were then ineligible shareholders, the corporation's S election terminated. The IRS accepted the representation that the failure was inadvertent and was not motivated by tax avoidance or retroactive tax planning. It ruled that the corporation would continue to be treated as an S corporation. The relief required the trustee to file both ESBT elections and the trusts' necessary returns or amended returns within 120 days.

Ruling snapshot

• Question: Was the corporation's S election termination inadvertent under Section 1362(f)?
• Outcome: approved, subject to ESBT elections and returns being filed within 120 days
• Key authorities: IRC §§ 1361(e), 1362(d), and 1362(f); Treas. Reg. § 1.1361-1(m)

Full text (IRS public release)

 Internal Revenue Service                                         Department of the Treasury
                                                                  Washington, DC 20224

 Number: 202414001                                                Third Party Communication: None
 Release Date: 4/5/2024                                           Date of Communication: Not Applicable
 Index Number: 1362.04-00
                                                                  Person To Contact:
 --------------------------------                                 --------------------, ID No. -----------------
 --------------------------------------                           Telephone Number:
 ------------------------------------                             --------------------
 ---------------                                                  Refer Reply To:
 ------------------------------                                   CC:PSI:B03
 ----------------------------------                               PLR-114519-23
                                                                  Date:
                                                                  January 12, 2024




LEGEND:

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

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

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

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

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

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

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

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



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

        This letter responds to a letter dated July 17, 2023, and subsequent
correspondence, submitted on behalf of X by its authorized representatives requesting a
ruling under § 1362(f) of the Internal Revenue Code (Code).
PLR-114519-23                                2

                                          FACTS

        The information submitted states that X was incorporated on Date 1 under the
laws of State and elected to be an S corporation effective Date 2. On Date 3, Trust 1
and Trust 2 acquired shares of X stock. X represents that Trust 1 and Trust 2 were
eligible to be electing small business trusts (ESBTs) within the meaning of § 1361(e)(1)
effective Date 3. However, the trustee of Trust 1 and Trust 2 failed to make elections
under § 1361(e)(3) treating Trust 1 and Trust 2 as ESBTs effective Date 3.
Consequently, X’s S corporation election terminated on Date 3.

       X represents that the circumstances resulting in the termination of its S
corporation election were not motivated by tax avoidance or retroactive tax planning. X
and its shareholders agree to make any adjustments required as a condition of
obtaining relief under § 1362(f).

                                           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 the year.

      Section 1361(b)(1)(B) defines a “small business corporation”, in part, as 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)(v) provides that for purposes of § 1361(b)(1)(B), an ESBT
is a permissible S corporation shareholder.

         Section 1361(e)(1)(A) provides that, for purposes of § 1361, except as provided
in § 1361(e)(1)(B), the term “electing small business trust” means any trust if (i) such
trust does not have as a beneficiary any person other than (I) an individual, (II) an
estate, (III) an organization described in § 170(c)(2)-(5), or (IV) an organization
described in § 170(c)(1) which holds a contingent interest in such trust and is not a
potential current beneficiary, (ii) no interest in such trust was acquired by purchase, and
(iii) an election under § 1361(e) applies to such trust.

       Section 1361(e)(3) provides that an election under § 1361(e) shall be made by
the trustee. Any such election shall apply to the taxable year of the trust for which made
and all subsequent taxable years of such trust unless revoked with the consent of the
Secretary.

       Section 1.1361-1(m)(2)(i) of the Income Tax Regulations provides, in part, that
the trustee of an ESBT must make the ESBT election by signing and filing, with the
service center where the S corporation files its income tax return, a statement that
PLR-114519-23                                  3

meets the requirements of § 1.1361-1(m)(2)(ii).

       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 first taxable year for
which the corporation is an S corporation) such corporation ceases to be a small
business corporation. Section 1362(d)(2)(B) provides that any termination under
§ 1362(d)(2) is effective on and after the date of cessation.

        Section 1362(f) provides, in relevant part, that if (1) an election under § 1362(a)
by any corporation was terminated under § 1362(d)(2), (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 the corporation at any time during
the period specified pursuant to § 1362(f), agrees to make 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 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 representations made, we conclude that
X’s S corporation election terminated on Date 3 when Trust 1 and Trust 2, ineligible S
corporation shareholders, acquired shares of X stock. We further conclude that the
circumstances resulting in the termination of X’s S corporation election were inadvertent
within the meaning of § 1362(f). Accordingly, X will continue to be treated as an S
corporation from Date 3, and thereafter, provided that X’s S corporation election was
valid and has not otherwise terminated under § 1362(d).

       This ruling is contingent on (1) the trustee of Trust 1 and Trust 2 filing ESBT
elections for Trust 1 and Trust 2 effective Date 3 with the appropriate service center
within 120 days from the date of this letter, and (2) Trust 1 and Trust 2 filing returns,
including amended returns, for Years with the appropriate service center within 120
days from the date of this letter to properly reflect the treatment of Trust 1 and Trust 2
as ESBTs effective Date 3. A copy of this letter should be attached to the ESBT
elections and the returns.

         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, or Trust 1’s or Trust 2’s eligibility to be an ESBT.
PLR-114519-23                                 4

       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 requested ruling, it is subject to verification on examination.

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

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


                                                  Sincerely,




                                                  Mary Beth Carchia
                                                  Senior Technician Reviewer, Branch 3
                                                  Office of Associate Chief Counsel
                                                  (Passthroughs & Special Industries)




Enclosure:
      Copy of this letter for § 6110 purposes




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