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 the corporation's S election ineffective. That failure also made its later election to treat a wholly owned subsidiary as a qualified subchapter S subsidiary ineffective. The corporation and its shareholders consistently filed as though both elections were valid and represented that the missing consent did not involve tax avoidance or retroactive tax planning. The IRS treated the corporation as an S corporation through the date it became another corporation's QSub and treated its subsidiary as a QSub from the requested date, subject to the elections otherwise being valid. Relief was contingent on the trust beneficiary's estate executor filing the required consent within 120 days.

Ruling snapshot

• Question: May the corporation and its subsidiary receive relief for ineffective S corporation and QSub elections 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: 201741009                                              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-106434-17
                                                               Date:
                                                               July 05, 2017

LEGEND

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

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

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

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

Sub               =         ------------------------------------------------
----------------------------------------------------------------------------------
---------------------------------------------------

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

State A           =        ----------------

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

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

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

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

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

Date 5            =        --------------------
PLR-106434-17                                      2


Date 6          =     --------------------------

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).

Facts

       According to the information submitted, X was incorporated under laws of State A
on Date 1 and made an election to be treated as an S corporation effective Date 2. Sub
was incorporated under the laws of State B on Date 3 and was at all times wholly-
owned by X. 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.

      X elected to treat Sub as a Qualified Subchapter S Subsidiary (QSub) effective
Date 4. Because X's S corporation election was ineffective, X's election to treat Sub as
a Qsub was also ineffective.

       On Date 5, 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 6, 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
election as of Date 2 and Sub being a valid Qsub as of Date 4. 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 and Sub as a Qsub.

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.
PLR-106434-17                                 3


       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.

       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
PLR-106434-17                                4

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 and X's election to treat Sub as a Qsub were ineffective
on Date 2 and Date 4, respectively. We further conclude that the ineffectiveness of X's
S corporation election and Sub's Qsub election constituted inadvertent invalid elections
within the meaning of 1362(f). Consequently, under 1362(f), we rule that X will be
treated as continuing to be an S corporation from Date 2 through Date 6, when X
became a Qsub, provided that X's S election was otherwise valid and not otherwise
terminated under 1362(d). Furthermore, Sub will be treated as a Qsub of X from Date 4
and thereafter, provided that Sub's Qsub election was otherwise valid and not otherwise
terminated under 1361(b)(3)(C).

        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 and
whether Sub was otherwise a valid Qsub. In addition, we express or imply no opinion
on whether the transactions on Date 6 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.
PLR-106434-17                                 5


        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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