Missed QSST election did not end S corporation status

Plain-English summary

An S corporation shareholder transferred stock to a grantor trust and later died. The trust remained an eligible shareholder for two years after the deemed owner's death, but it kept the stock beyond that period without making a qualified subchapter S trust election. The corporation and its shareholders nevertheless continued filing returns consistently with S corporation treatment, and the trust otherwise met the QSST requirements. The IRS found the resulting termination of the S election inadvertent and treated the corporation as continuously maintaining S status. Relief was conditioned on the trustee filing a QSST election effective on the termination date within 120 days and on all parties continuing the required tax treatment.

Ruling snapshot

• Question: Was the S corporation's termination inadvertent when a trust failed to make a QSST election after its two-year post-death eligibility period expired?
• Outcome: approved, continuous S corporation status subject to a timely remedial QSST election
• Key authorities: IRC §§ 1361(c)(2), 1361(d), 1362(f)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201733001                                             [Third Party Communication:
Release Date: 8/18/2017                                       Date of Communication: Month DD, YYYY]
Index Number: 1361.03-02
                                                              Person To Contact:
-----------------------------------                           --------------------, ID No. ------------------
--------------------------                                    Telephone Number:
----------------------------------                            ----------------------
------------------------------------------                    Refer Reply To:
                                                              CC:PSI:B03
                                                              PLR-101478-17
                                                              Date:
                                                              May 18, 2017




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

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

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

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

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

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

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

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

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


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


This letter responds to a letter dated December 31, 2016, that was submitted on behalf
of X, requesting a ruling under § 1362(f) of the Internal Revenue Code (the Code).

                                                     FACTS
PLR-101478-17                                 2

The information submitted states that X was incorporated in State on Date 1 and
elected to be an S corporation on Date 2.

On Date 3, A, a shareholder of X, transferred X stock to Trust. Trust was a grantor trust
described in § 1361(c)(2)(A)(i) of which A was the deemed owner. On Date 4, A died
and Trust ceased to be a grant trust, but continued to qualify as an eligible S
corporation shareholder under § 1361(c)(2)(A)(ii) for the 2-year period beginning on the
day of the deemed owner’s death. However, Trust continued to hold the X stock after
the two-year period had ended on Date 5. According to X, Trust qualifies as a qualified
subchapter S Trust (QSST), but its trustees made no QSST election. As a result, X’s S
corporation election terminated on Date 5.

X represents that Trust met the requirements of a QSST within the meaning of
§ 1361(d)(3) at all time since Date 5, except that the trustee of Trust failed to make the
election under § 1361(d)(2). X also represents that X and its shareholders, including
Trust, have filed income tax returns consistent with the treatment of X as an S
corporation.

                                            LAW

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 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 purposes of § 1361(b)(1)(B), a trust may be a
shareholder if all of it 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. 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(c)(2)(A)(ii) provides that 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-101478-17                                 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), such trust shall be 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 1362(f) provides that if (1) an election under § 1362(a) by any corporation (A)
was not effective for the taxable year for which it was made (determined without regard
to § 1362(b)(2)) by reason of a failure to meet the requirements of § 1361(b) or to obtain
shareholder consents, or (B) was terminated under § 1362(d)(2) or (3), (2) the Secretary
determines that the circumstances resulting in such ineffectiveness were inadvertent,
(3) no later than a reasonable period of time after discovery of the event resulting in the
ineffectiveness, steps were taken (A) so that the corporation is a small business
corporation, or (B) to acquire the required shareholder consents, 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 such 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 such ineffectiveness, the corporation shall be treated as an S
corporation during the period specified by the Secretary.

                                       Conclusion

Based solely upon the facts submitted and the representations made, we conclude that
the termination of X’s S corporation election on Date 5 was inadvertent within the
meaning of § 1362(f). We further hold that, pursuant to the provisions of § 1362(f), X
will be treated as continuing to be an S corporation from Date 5 and thereafter, provided
X’s S corporation election was valid and was not otherwise terminated under § 1362(d).

This ruling is contingent upon the trustee of Trust filing a QSST election effective Date 5
within 120 days from the date of this letter. A copy of this letter should be attached to
the election. If X or its shareholders fail to treat themselves as described above, this
ruling is null and void.

Except as specifically ruled upon above, no opinion is expressed concerning the
Federal tax consequences of any facts discussed or referenced in this letter, including
whether X was or is an S corporation for Federal tax purposes.
PLR-101478-17                                4



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


                                      Sincerely,



                                  By:_________________________
                                     Richard T. Probst
                                     Senior Technician Reviewer, Branch 3
                                     Associate Chief Counsel
                                     (Passthroughs & Special Industries)




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