Corporation keeps S status after a trust misses its QSST election

Plain-English summary

A grantor trust held shares in an S corporation and later became a complex trust. The trust represented that it qualified as a qualified subchapter S trust at that point, but its beneficiary did not make a timely QSST election. The resulting ineligible shareholder terminated the corporation's S election. The corporation represented that the error was inadvertent, involved no tax avoidance or retroactive planning, and that all affected returns treated it as an S corporation. The IRS allowed S status to continue, conditioned on the beneficiary filing the QSST election within 120 days.

Ruling snapshot

• Question: May the corporation retain S status after a shareholder trust failed to make a timely QSST election?
• Outcome: Approved, conditioned on the beneficiary filing the QSST election within 120 days
• Key authorities: IRC §§ 1361(d), 1362(f)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202447002 Third Party Communication: None
Release Date: 11/22/2024 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
-------------------------- ----------------------, ID No. -----------------
------------------------------------- Telephone Number:
-------------------------- --------------------
------------------------- Refer Reply To:
CC:PSI:B03
PLR-102728-24
Date:
August 21, 2024

Legend

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

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

State = --------

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

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

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

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

    This letter responds to a letter dated January 31, 2024, submitted on behalf of X

by its authorized representatives requesting a ruling under § 1362(f) of the Internal
Revenue Code (Code).

   The information submitted states that X was incorporated on Date 1, under the

laws of State. Effective Date 1, X elected to be taxed as an S corporation.

    On Date 2, Trust, a grantor trust, acquired shares in X. X represents that Trust

became a “complex trust” rather than a grantor trust for federal tax purposes on Date

3. As of Date 3, X represents that Trust met the requirements to be treated as a
   qualified subchapter S trust (QSST) as described in § 1361(d), but a timely election to
   treat Trust as a QSST was not made. Therefore, Trust was not an eligible S
   PLR-102728-24 2

corporation shareholder and as a result, X’s S corporation election terminated on
Date 3.

    X represents that the circumstances resulting in the termination of its S

corporation election were inadvertent and were not motivated by tax avoidance or
retroactive tax planning. Additionally, X represents that X and its shareholders filed all
returns consistent with X’s status as an S corporation. X and its shareholder agreed to
make any adjustments (consistent with the treatment of X as an S corporation) as may
be required by the Secretary.

                               LAW AND ANALYSIS

   Section 1362(a) provides that a small business corporation may elect to be an

S corporation.

    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 a “small business corporation” means 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 1 class of stock.

     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(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, in part, that in the case of a QSST with respect to

which a beneficiary makes an election under § 1361(d)(2) (A) such trust shall be
treated as a trust described in § 1361(c)(2)(A)(i), (B) 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)(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 income beneficiary in the trust shall terminate on the earlier of such
PLR-102728-24 3

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 that beneficiary; and (B) all of the income (within the meaning of § 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)(A) provides that an election under § 1362(a) shall be

terminated whenever the corporation ceases to be a small business corporation. A
termination of an S corporation 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) or (3); (2) the Secretary
determines that the circumstances resulting in such 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 of the corporation at
any time during the period specified under § 1362(f), agrees to make the adjustments
(consistent with the treatment of the corporation as an S corporation) as may be
required by the Secretary for that period, then, notwithstanding the circumstances
resulting in such termination, the corporation shall 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 became an ineligible
shareholder. We further conclude that the termination of X’s S election was
inadvertent within the meaning of § 1362(f). Therefore, pursuant to the provisions of
§ 1362(f), X will be treated as an S corporation effective Date 3, and thereafter,
provided X’s S corporation election is valid and not otherwise terminated under
§ 1362(d).

   This relief is contingent on the beneficiary of Trust filing a QSST election with

the appropriate service center, within 120 days from the date of this letter effective
Date 3. A copy of this letter should be attached to the election.

    Except as specifically ruled 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 and the regulations thereunder. Specifically, we express or imply no opinion
regarding X’s eligibility to be an S corporation or Trust's eligibility to be treated as a
QSST.
PLR-102728-24 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 ruling request, it is subject to verification on
examination.

    This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

of the Code provides that it may not be used or cited as precedent.

   In accordance with the power of attorney on file with this office, we are sending

a copy of this letter to X’s authorized representatives.

                                              Sincerely,



                                              Richard T. Probst

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

Enclosure
Copy for § 6110 purposes

cc: