Late QSST election does not end corporation's S status

Plain-English summary

Shares of an S corporation were transferred to a trust eligible to be a qualified subchapter S trust, but the beneficiary inadvertently failed to make the required QSST election on time. That failure technically terminated the corporation's S election when the trust acquired the shares. The corporation continued filing as an S corporation, represented that the mistake did not involve tax avoidance or retroactive planning, and agreed with its shareholders to make any required adjustments. The IRS treated the termination as inadvertent and allowed continuous S status, provided the beneficiary filed the QSST election and all parties filed consistent returns within 120 days.

Ruling snapshot

• Question: Can an S corporation retain continuous S status after a trust beneficiary inadvertently fails to file a timely QSST election?
• Outcome: approved, conditioned on filing the QSST election and consistent returns within 120 days
• Key authorities: IRC §§ 1361(d) and 1362(d) and (f); Treas. Reg. § 1.1361-1(j)(6)(ii)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202005012 Third Party Communication: None
Release Date: 1/31/2020 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
-------------------------------------- --------------------, ID No. --------------
----------------------------------- Telephone Number:
-------------------------------- ----------------------
----------------------------- Refer Reply To:
CC:PSI:B03
PLR-111480-19
Date:
November 04, 2019

LEGEND

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

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

D1 = -------------------

D2 = -----------------------

D3 = ------------------------------

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

Beneficiary = ---------------------------

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

  This responds to a letter dated May 9, 2019, and subsequent correspondence,

submitted on behalf of X by its authorized representatives, requesting a ruling under §
1362(f) of the Internal Revenue Code.

   The information submitted states that X was incorporated under the laws of State

on D1, and elected to be an S corporation effective on D2. On D3, shares of X were
transferred to Trust.

PLR-111480-19 2

   X represents that Trust was eligible to elect qualified subchapter S trust (QSST)

treatment under § 1361(d). However, the beneficiary of Trust inadvertently failed to
timely make a QSST election. Therefore, X’s S election terminated on D3.

  X represents that it has filed consistently with the treatment of X as an S

corporation since D3. X represents that the termination was not motivated by tax
avoidance or retroactive tax planning. X and its shareholders have agreed to make any
adjustments that the Commissioner may require, consistent with the treatment of X as
an S corporation.

   Section 1361(a)(1) of the Code 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 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) as owned by
an individual who is a citizen or resident of the United States may be an S corporation
shareholder.

   Section 1361(d)(1) provides that in the case of a QSST for 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 the trust shall be
treated as the owner of that portion of the trust that 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) apply. Section 1.1361-1(j)(6)(ii) provides that the current income beneficiary
of a QSST must make the election under § 1361(d)(2) by signing and filing with the
service center with which the corporation files its income tax returns the applicable form
or a statement including the information listed in § 1.1361-1(j)(6)(ii).

   Section 1362(d)(2) provides that (A) in general, an election under § 1362(a) shall

be terminated whenever (at any time on or after the first day of the first taxable year for
which the corporation is an S corporation) such corporation ceases to be a small
business corporation, and (B) any termination under § 1362(d)(2) shall be effective on
and after the date of cessation.

  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 made (determined

PLR-111480-19 3

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 the
ineffectiveness or termination were inadvertent, (3) no later than a reasonable period of
time after discovery of the circumstances resulting in the ineffectiveness or termination,
steps were taken (A) so that the corporation is a small business corporation or (B) to
acquire the 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 the ineffectiveness or
termination, the corporation will be treated as an S corporation during the period
specified by the Secretary.

   Based solely on the facts submitted and the representations made, we conclude

that X’s S corporation election terminated on D3, because of the inadvertent failure of
Trust’s beneficiary to make a QSST election, and that this termination of X’s S election
was an inadvertent termination within the meaning of § 1362(f). Accordingly, pursuant
to the provisions of § 1362(f), X will be treated as continuing to be an S corporation from
D3 and thereafter, provided X’s S corporation election was valid and not otherwise
terminated under § 1362(d).

    This letter ruling is subject to the following conditions. No later than 120 days

from the date of this letter: (1) Beneficiary of Trust must file an election to treat Trust as
a QSST, effective Date 3, with the appropriate service center; and (2) X, and its
shareholders, including Trust and Beneficiary, must file any original and amended
returns for all open taxable years consistent with the relief granted in this letter. A copy
of this letter should be attached to the QSST election and to any amended returns. If
these conditions are not met, then this ruling is null and void.

     Except as specifically set forth above, we express or imply no opinion concerning

the federal tax consequences of the transactions described above under any other
provision of the Code. Specifically, we express or imply no opinion regarding X’s
eligibility to be an S corporation or Trust’s eligibility to be a QSST.

   The ruling contained in this letter is based upon information and representations

submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the ruling request, it is subject to verification on examination.

PLR-111480-19 4

    This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent. Pursuant to a power of attorney
on file, a copy of this letter is being sent to X’s authorized representatives.

                                  Sincerely,



                                  Wendy L. Kribell
                                  Senior Counsel, Branch 3
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

Enclosures: 2
Copy of this letter
Copy for § 6110 purposes

cc: