Six missed QSST elections did not end S status

Plain-English summary

Four testamentary trusts became ineligible S corporation shareholders when their two-year eligibility period expired, and two additional trusts later received S corporation stock. All six trusts otherwise met the qualified subchapter S trust requirements, but their beneficiaries did not timely make QSST elections. The corporation and shareholders were unaware of the filing requirement, did not intend to terminate S status, and consistently filed as an S corporation. The IRS treated both terminating events as inadvertent and allowed the corporation to remain an S corporation continuously. Relief required the beneficiaries to file the six QSST elections with the proper effective dates within 120 days.

Ruling snapshot

• Question: Were the S corporation terminations caused by six trusts' missed QSST elections inadvertent?
• Outcome: approved, continuous S status subject to remedial elections within 120 days
• Key authorities: IRC §§ 1361(c)(2), 1361(d), 1362(d), 1362(f)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201732020                                             Third Party Communication: None
Release Date: 8/11/2017                                       Date of Communication: Not Applicable
Index Number: 1362.01-00, 1362.01-02,
              1362.02-00, 1362.02-02,                         Person To Contact:
              1362.04-00, 1362.00-00                          ----------------------------,
                                                              ID No. ------------------
-----------------------------------                           Telephone Number:
------------------------------------                          ----------------------
------------------------------                                Refer Reply To:
-------------------------                                     CC:PSI:B01
                                                              PLR-135989-16
                                                              Date:
                                                              May 03, 2017




LEGEND

X                 = -----------------------------------------------------------------------------------------------
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State             = ---------

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

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

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

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

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

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

Trust 2           = -----------------------------------------------------------------------------------------------
---------------------------------------------
PLR-135989-16                                              2


Trust 3           = -----------------------------------------------------------------------------------------------
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Trust 4           = -----------------------------------------------------------------------------------------------
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Trust 5           = -----------------------------------------------------------------------------------------------
---------------------------------------------

Trust 6          = -------------------------------------
-




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

        This responds to a letter dated November 14, 2016, and subsequent
correspondence, submitted on behalf of X by X's authorized representative, requesting
relief under § 1362(f) of the Internal Revenue Code (the Code).

FACTS

        According to the information submitted, X was incorporated under the laws of
State on Date 1. X elected to be treated as an S corporation effective Date 2. On Date
3, stock in X was transferred to Trust 1, Trust 2, Trust 3, and Trust 4 pursuant to the
terms of the will of a deceased shareholder. Trust 1, Trust 2, Trust 3, and Trust 4
qualified as permissible S corporation shareholders under § 1361(c)(2)(A)(iii) for the
two-year period beginning on Date 3.

       On Date 4, Trust 1, Trust 2, Trust 3, and Trust 4 became ineligible shareholders
of X. As a result, X's election to be an S corporation terminated. In addition, on Date 5,
a shareholder of X transferred stock in X to Trust 5 and Trust 6.

        X represents that Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, and Trust 6 have, at
all times since the transfers of X stock to the trusts, met the requirements of a qualified
subchapter S trust (QSST), within the meaning of § 1361(d)(3). However, the
beneficiaries of Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, and Trust 6 failed to timely file
elections under § 1361(d)(2) for the trusts to be QSSTs.

      X represents that X and Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, and Trust 6
were unaware of the need to file a QSST election in order to continue to qualify as
PLR-135989-16                                  3

eligible S corporation shareholders. X further represents that it did not intend for its S
corporation election to terminate and the termination was not motivated by tax
avoidance. X also represents that other than the failure to timely file a QSST election
for Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, and Trust 6, X has qualified as a small
business corporation at all times since its election on Date 1. X also represents that X
and all its shareholders have filed consistently with X being treated as an S corporation.
Finally, X and its shareholders agree to make any adjustments required by the
Secretary consistent with the treatment of X as an S corporation.

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) defines a “small business corporation” as a domestic
corporation that is not an ineligible corporation and that 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 one
class of stock.

        Section 1361(c)(2)(A)(i) provides that 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 an S corporation shareholder.

       Section 1361(c)(2)(A)(iii) provides that, for purposes of § 1361(b)(1)(B), a trust
with respect to stock transferred to it pursuant to the terms of a will is a permitted
shareholder, 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 a QSST whose beneficiary makes an election
under § 1361(d)(2) will be treated as a trust described in § 1361(c)(2)(A)(i), and the
QSST's beneficiary will be treated as the owner (for purposes of § 678(a)) of that portion
of the QSST's S corporation stock to which the election under § 1362(d)(2) applies.

        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 beneficiary in the trust shall terminate on the earlier of the beneficiary's death or
the termination of the trust; and (iv) upon the 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 (with the meaning of § 643(b)) of which is distributed (or
PLR-135989-16                                 4

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.

       Section 1362(f) provides, in relevant part, that if (1) an election under § 1362(a)
by any corporation was terminated under paragraph (2) or (3) of § 1362(d), (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 termination, steps were taken so that the corporation is once
more 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 pursuant to
§ 1362(f), agrees to make any adjustments (consistent with the treatment of the
corporation as an S corporation) as may be required by the Secretary with respect to
the period, then, notwithstanding the circumstances resulting in the termination, the
corporation will be treated as continuing to be an S corporation during the period
specified by the Secretary.

CONCLUSION

        Based solely on the information submitted and the representations made, we
conclude that X's S election terminated on Date 4 when Trust 1, Trust 2, Trust 3, and
Trust 4 became ineligible S corporation shareholders, and that the termination was
inadvertent within the meaning of § 1362(f). Moreover, had X's S election not already
terminated, it would have terminated on Date 5 when Trust 5 and Trust 6 became
ineligible shareholders. Similarly, this terminating event would have been an
inadvertent termination within the meaning of § 1362(f). Therefore, X will be treated as
continuing to be an S corporation from Date 4, and thereafter, provided that X's S
corporation election was otherwise valid and was not otherwise terminated under
§ 1362(d).

       Within 120 days from the date of this letter, the beneficiaries of Trust 1, Trust 2,
Trust 3, and Trust 4 must file elections to treat Trust 1, Trust 2, Trust 3, and Trust 4 as
QSSTs, effective Date 4, with the appropriate service center. In addition, within 120
days from the date of this letter, the beneficiaries of Trust 5 and Trust 6 must file
elections to treat Trust 5 and Trust 6 as QSSTs, effective Date 5, with the appropriate
service center. A copy of this letter should be attached to the elections. If these
conditions are not met, then this ruling is null and void.

       Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, no opinion is expressed concerning whether X is
PLR-135989-16                                 5

otherwise eligible to be treated as an S corporation, or whether Trust 1, Trust 2, Trust 3,
Trust 4, Trust 5, and Trust 6 are eligible to be treated as QSSTs.

      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,

                                                  Joy C. Spies

                                          ________________________________
                                          Joy C. Spies
                                          Senior Technician Reviewer, Branch 1
                                          Office of the Associate Chief Counsel
                                          (Passthroughs & Special Industries)


Enclosures (2)

Copy of this letter
Copy of this letter for § 6110 purposes