Late QSST election receives inadvertent S termination relief

Plain-English summary

After the owner of a grantor trust died, the trust continued holding S corporation shares for a beneficiary but did not timely elect qualified subchapter S trust status. That failure terminated the corporation's S election. The IRS found the termination inadvertent because it was not motivated by tax avoidance or retroactive planning and the parties had consistently filed as though S status continued. It treated the corporation as remaining an S corporation, conditioned on the beneficiary filing the QSST election within 120 days.

Ruling snapshot

• Question: Could the corporation receive inadvertent termination relief after a trust failed to make a timely QSST election?
• Outcome: Approved
• Key authorities: IRC §§ 1361(c), 1361(d), 1362(f)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201550014 Third Party Communication: None
Release Date: 12/11/2015 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
-------------------------------- ------------------------------ ------------
--------------------------------------------------- Telephone Number:
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--------------- Refer Reply To:
------------------------------ CC:PSI:B01
------------------------ PLR-108281-15
Date:
August 18, 2015

LEGEND:

X = -----------------------------------------------------------------------------------------------------
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A = ---------------------------

B = -----------------------------------------------------------------------------------------------------
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Trust = -----------------------------------------------------------------------------------------------------
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State = -------------

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

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

Date 3 = ------------------------
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Date 4 = ------------------------

Dear-----------------
PLR-108281-15 2

This responds to a letter dated March 4, 2015, submitted on behalf of X, requesting
inadvertent termination relief pursuant to § 1362(f) of the Internal Revenue Code (the
Code).

Facts

The information submitted states that X was incorporated on Date 1, under the laws of
State. Effective Date 2, X elected to be taxed as an S corporation.

During A’s life, A owned shares in X through Trust, a grantor trust. On Date 3, A died.
After A’s death, Trust continued to hold the X shares for the benefit of B, causing X’s S
corporation election to terminate on Date 4. X represents that Trust was eligible to elect
to be a qualified subchapter S trust (QSST) from Date 3 onward and continues to be
eligible. However, a QSST election was not timely made for Trust.

X represents that the circumstances resulting in the termination of X’s S corporation
election were inadvertent and were not motivated by tax avoidance or retroactive tax
planning. Additionally, X represents that X and its shareholders have filed their federal
income tax returns consistent with having a valid S corporation election in effect for X.
X and its shareholders have agreed to make any adjustments consistent with the
treatment of X as an S corporation as may be required by the Secretary
with respect to the period specified by § 1362(f).

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 a “small business corporation” means a domestic
corporation that is not an ineligible corporation and that 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 the purposes of §1362(b)(1)(B), a trust all of
which is treated (under title 26, subtitle A, chapter 1, subchapter J, part I, subpart E of
the United States Code) 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)(A)(ii) provides that for purposes of § 1361(b)(1)(B), a trust which was
described in § 1361(c)(2)(A)(i) immediately before the death of the deemed owner and
which continues in existence after such death, is a permitted shareholder, but only for
the 2-year period beginning on the day of the deemed owner’s death.
PLR-108281-15 3

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 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(d)(2)(A) provides that an election under § 1362(a) is 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)(A) is effective on and
after the date of cessation.

Section 1362(f) provides 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 is a small business corporation;
and (4) the corporation, 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 representation made, we conclude X’s S
election terminated on Date 4 upon the failure to timely file a QSST election for Trust.
We also conclude that the termination of X’s S corporation election was inadvertent
within the meaning of § 1362(f).

Accordingly, under § 1362(f), X will be treated as continuing to be an S corporation from
Date 4 and thereafter, provided that X’s S election is valid and not otherwise terminated
under § 1362(d).
PLR-108281-15 4

This relief is contingent upon B filing a QSST election for Trust effective Date 4 within
120 days from the date of this letter. 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 transactions described above under any other
provision of the Code. Specifically, we express or imply no opinion regarding whether X
is otherwise eligible to be an S corporation or Trust’s eligibility to be a QSST.

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

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to X’s authorized representative.

                                    Sincerely,


                                    Laura C. Fields
                                    Laura C. Fields
                                    Senior Technician Reviewer, Branch 1
                                    (Passthroughs & Special Industries)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes

cc: