Missing shareholder consent receives S corporation relief

Plain-English summary

A corporation's Form 2553 lacked the signature of the income beneficiary of a shareholder trust, making its S corporation election ineffective. The corporation and its shareholders consistently filed as though the election were valid and represented that the missing consent did not involve tax avoidance or retroactive tax planning. After the beneficiary died and the stock passed to eligible individual shareholders, the corporation later became a qualified subchapter S subsidiary in a transaction intended to be an F reorganization. The IRS treated the corporation as an S corporation from the requested election date through the date it became a QSub, subject to the election otherwise being valid. Relief was contingent on the beneficiary's estate executor filing the required consent within 120 days.

Ruling snapshot

• Question: May the corporation receive relief for an ineffective S election caused by a missing shareholder consent?
• Outcome: approved
• Key authorities: IRC §§ 1361, 1362(a), 1362(f); Treas. Reg. § 1.1362-6(b)

Full text (IRS public release)

Internal Revenue Service                                         Department of the Treasury
                                                                 Washington, DC 20224

Number: 201741008                                                Third Party Communication: None
Release Date: 10/13/2017                                         Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.01-00,
              1362.01-01, 1362.04-00                             Person To Contact:
                                                                 ---------------------------,
------------------------                                         ID No. ----------------
---------------------------------                                Telephone Number:
-------------------                                              ----------------------
--------------------------------                                 Refer Reply To:
                                                                 CC:PSI:B01
                                                                 PLR-106433-17
                                                                 Date:
                                                                 July 05, 2017

LEGEND

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

Y                 =        -----------------------------------

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

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

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

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

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

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

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

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


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

       This letter responds to a letter dated February 23, 2017, submitted on behalf of
X, requesting relief under § 1362(f) of the Internal Revenue Code (Code).
PLR-106433-17                                 2




Facts

      According to the information submitted, X was incorporated under laws of State
on Date 1 and made an election to be treated as an S corporation effective Date 2. The
information submitted states that the Form 2553 that X filed was not signed by A, the
income beneficiary of Trust, which was a qualified subchapter S trust (QSST) within the
meaning of § 1361(a). Therefore, X's S corporation election was ineffective.

       On Date 3, A died. Upon the death of A, the X stock was distributed to
individuals who were eligible shareholders of X. B was the executor of A’s estate and
has been appointed as a special administrator with regard to A’s estate to resolve X’s
ineffective S corporation election.

        On Date 4, incident to what was intended to qualify as a reorganization under §
368(a)(1)(F), X’s shareholders contributed all of their stock in X to Y in exchange for
shares in Y. Effective immediately afterwards, Y made an election to treat X as a
qualified subchapter S subsidiary (Qsub).

        X represents that there was no tax avoidance or retroactive tax planning involved
in the failure of Trust to properly execute X's Form 2553. X further represents that X
and all its shareholders have filed consistently with X having a valid S corporation as of
Date 2. X and its shareholders have agreed to make any adjustment that the
Commissioner may require, 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)(B) provides that, for purposes of subchapter S, the term
“small business corporation” means a domestic corporation which is not an ineligible
corporation and which 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 all
of which is treated (under subpart E of part I of subchapter J of chapter 1 of the Code)
as owned by an individual who is a citizen or resident of the United States may be a
shareholder.
PLR-106433-17                                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), 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(a)(2) provides that an S corporation election shall be valid only if all
persons who are shareholders in such corporation on the day on which such election is
made consent to such election.

       Section 1.1362-6(b)(2)(iv) provides that in the case of a trust described in section
1361(c)(2)(A) (including a trust treated under section 1361(d)(1)(A) as a trust described
in section 1361(c)(2)(A)(i) and excepting an electing small business trusts described in
section 1361(c)(2)(A)(v)), only the person treated as the shareholder for purposes of
section 1361(b)(1) must consent to the election.

        Section 1362(f) provides that if (1) an election under § 1362(a) or §
1361(b)(3)(B)(ii) by any corporation (i) was not effective for the taxable year for which
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 (ii) was terminated
under § 1362(d)(2) or (3) or § 1361(b)(3)(C); (2) the Secretary determines that the
circumstances resulting in such ineffectiveness or termination were inadvertent; (3) no
later than a reasonable period of time after discovery of the circumstances resulting in
such ineffectiveness or termination, steps were taken so that the corporation for which
the election was made or the termination occurred is a small business corporation or a
QSub, as the case may be, or to acquire the required shareholder consents; and (4) the
corporation for which the election was made or the termination occurred, and each
person who was a shareholder of the corporation at any time during the period specified
pursuant to § 1362(f), agree to make the adjustments (consistent with the treatment of
the corporation as an S corporation or a QSub, as the case may be) as may be required
by the Secretary with respect to this period, then, notwithstanding the circumstances
resulting in such ineffectiveness or termination, the corporation shall be treated as an S
corporation or a QSub, as the case may be, 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 was ineffective on Date 2. We further conclude that the
PLR-106433-17                                 4

ineffectiveness of X's S corporation election constituted an inadvertent invalid election
within the meaning of 1362(f). Consequently, under 1362(f), we rule that X will be
treated as an S corporation from Date 2 through Date 4, when X became a Qsub,
provided that X's S election was otherwise valid and not otherwise terminated under
1362(d).

        This relief is contingent upon B, the executor of A’s estate, signing a written
statement as described in 1.1362-6(b)(1) consenting to X's S corporation election
effective Date 2. The written statement must be filed with the appropriate service center
within 120 days from the date of this letter, indicating that the statement is to be
associated with X's originally filed Form 2553.

       Except as specifically ruled above, we express or imply no opinion as to the
federal income tax consequences of the facts described above under any other
provision of the code, including whether X was otherwise a valid S corporation. In
addition, we express or imply no opinion on whether the transactions on Date 4 qualified
as an F reorganization within the meaning of § 368(a)(1)(F).

      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.

        In accordance with the Power of Attorney on file with this office, a copy of this
letter ruling will be sent to X's authorized representatives.



                                           Sincerely,



                                           Faith P. Colson

                                           Faith P. Colson
                                           Senior Counsel, Branch 1
                                           Office of Associate Chief Counsel
                                           (Passthroughs & Special Industries)



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


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