Late QSST elections receive inadvertent-termination relief

Plain-English summary

After an S corporation shareholder died, a formerly eligible trust needed a qualified subchapter S trust election to remain an eligible shareholder. The beneficiary failed to timely elect QSST treatment for that trust and for a second trust that later received some shares, causing the corporation's S election to terminate. The failures were inadvertent and were not motivated by tax avoidance or retroactive planning, and the corporation and shareholders agreed to required adjustments. The IRS granted inadvertent-termination relief, treating S status as continuous if the beneficiary filed both QSST elections with the proper effective dates within 120 days and the S election was not otherwise terminated.

Ruling snapshot

• Question: May the corporation retain continuous S status despite untimely QSST elections for two shareholder trusts?
• Outcome: Approved; S status continued if both QSST elections were filed within 120 days with the specified retroactive dates.
• Key authorities: IRC §§ 1361(c), 1361(d), and 1362(f)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201604010                                              Third Party Communication: None
Release Date: 1/22/2016                                        Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.03-00
                                                               Person To Contact:
-----------------                                              --------------, ID No. -----------------
-------------------------                                      Telephone Number:
--------------------------------                               ---------------------
-----------------------------                                  Refer Reply To:
                                                               CC:PSI:BO1
                                                               PLR-116696-15
                                                               Date:
                                                               October 08, 2015


LEGEND

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

A                 =         --------------
-----------------------------------------------------

B                 =         -----------------
-----------------------------------------------------

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

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

Trust 3           =         --------------------------------------
-----------------------------------------------------

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

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

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

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

Date 5            =        --------------------------

a%                =        ------
PLR-116696-15                                2


b%              =      ----------

State           =      --------



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

This responds to a letter dated January 29, 2015, and subsequent information,
submitted on behalf of X by X’s authorized representative, requesting relief under
section 1362(f) of the Internal Revenue Code.

FACTS

According to the information submitted and representations made within, X was
incorporated and made an S election effective Date 1, under the laws of State.

During A’s life, A owned a% of the shares in X through Trust 1. Trust 1 was a trust
described in § 1361(c)(2)(A)(i) and was an eligible shareholder of X. A died on Date 2.
After A’s death, Trust continued to be an eligible shareholder of X under §
1361(c)(2)(A)(ii) until Date 3. As of Date 3, Trust 1 was intended to be treated as a
qualified subchapter S trust (QSST) however, B, the beneficiary of Trust 1, did not file a
timely election to treat Trust 1 as a QSST. Therefore, on Date 3, Trust 1 became an
ineligible shareholder of X, causing X’s S corporation election to terminate on Date 3.

Trust 1 transferred b% of its X shares to Trust 2 on Date 4. As of Date 4, X represents
that Trust 2 was intended to be treated as a QSST. However, B, the beneficiary of
Trust 2 did not file a timely election to treat Trust 2 as a QSST.

On Date 5, Trust 2 distributed all of its shares in X to B. B then immediately transferred
the X shares to Trust 3. Trust 3 is a trust described in § 1361(c)(2)(A)(i) and is an
eligible shareholder of X.

X represents that the circumstances resulting in the failure to file the QSST elections for
Trust 1 and Trust 2 was inadvertent and was not motivated by tax avoidance or
retroactive tax planning. X and its shareholders have agreed to make such adjustments
(consistent with the treatment of X as an S corporation) as may be required by the
Secretary.

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.
PLR-116696-15                                3


Section 1361(b)(1) defines a “small business corporation” as 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) 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)(iii) provides that a trust may be an S corporation shareholder with
respect to stock transferred to it pursuant to a will, but only for the 2-year period
beginning on the day on which such stock is transferred to it.

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 the trust
is treated as the owner of that portion of the trust which consists of stock in a S
corporation with respect to which the election under § 1361(d)(2) is made.

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) or § 1361(b)(3)(C); (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 such 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 such
corporation at any time during the period specified pursuant to § 1362(f), agrees to
make the adjustments (consistent with the treatment of such corporation as an S
corporation) as may be required by the Secretary with respect to such period, then,
notwithstanding the circumstances resulting in such termination, such corporation shall
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 as a result of the failure to make a
timely QSST election for Trust 1. We further conclude that the termination of X’s S
election on Date 3 was inadvertent within the meaning of § 1362(f). Pursuant to the
provisions of § 1362(f), X will be treated as continuing to be an S corporation as of Date
3 and thereafter, provided that B files a QSST election for Trust 1 and Trust 2 with an
effective date of Date 3 and Date 4, respectively, with the appropriate service center
within 120 days from the date of this letter, and X’s S corporation election is not
PLR-116696-15                                4

otherwise terminated under § 1362(d). A copy of this letter must be attached to the
QSST elections.

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. Further, no opinion is expressed or implied concerning whether Trust 1
and Trust 2 meet the requirements of a QSST under § 1361(d)(3).

This ruling is directed only to the taxpayer who requested it. According to § 6110(k)(3),
this ruling may not be used or cited as precedent.

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

                                      Sincerely,


                                      David R. Haglund
                                      David R. Haglund
                                      Branch Chief, Branch 1
                                      Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)



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




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