Late QSST election did not end S corporation status

Plain-English summary

An S corporation shareholder transferred stock to a grantor trust. When the shareholder died, the trust remained an eligible shareholder for two years, but it continued holding the stock after that period without its beneficiary making a qualified subchapter S trust election. That omission terminated the corporation's S election. The IRS treated the termination as inadvertent because the trust otherwise met the QSST requirements and the corporation and its shareholders had consistently filed as though the S election remained effective. The corporation would continue to be treated as an S corporation if the beneficiary filed the QSST election, effective on the termination date, within 120 days of the ruling.

Ruling snapshot

• Question: Was the S corporation's termination caused by the missing QSST election inadvertent?
• Outcome: Approved, with 120 days to file the retroactive 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: 201830004 Third Party Communication: None
Release Date: 7/27/2018 Date of Communication: Not Applicable
Index Number: 1361.03-02, 1362.04-00
Person To Contact:
----------------------------------- -----------------------, ID No. -------------------
--------------------------- ---------------------------------------------------
---------------------------------- Telephone Number:
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Refer Reply To:
CC:PSI:B03
PLR-114053-18
Date:
April 26, 2018

Legend

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

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

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

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

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

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

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

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

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

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

An earlier version of this Private Letter Ruling, dated May 18, 2017 (PLR-101478-17),
was published. This letter responds to the 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). This letter, as of its effective date, supersedes PLR-101478-17.

PLR-114053-18 2

                                     FACTS

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 2-year period had ended on Date 5. According to X, Trust qualifies as a qualified
subchapter S trust (QSST), but its beneficiary 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 beneficiary 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 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 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 a shareholder of an S
corporation. 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.

PLR-114053-18 3

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.

Section 1361(d)(1) provides, in part, that in the case of a QSST with respect to which a
beneficiary makes an election under § 1361(d)(2) (A) such trust shall be treated as a
trust described in § 1361(c)(2)(A)(i), (B) 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, in part, 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 beneficiary 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 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 or implied concerning the eligibility of
X to be an S corporation.

PLR-114053-18 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.

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

                                  Sincerely,


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