S corporation receives relief after five trusts missed QSST elections

Plain-English summary

Five trusts acquired shares of an S corporation and met the substantive
requirements for qualified subchapter S trusts. Their respective income
beneficiaries did not timely make the required QSST elections, so the trusts
became ineligible shareholders and terminated the corporation's S election.
The corporation represented that the failure was inadvertent and not motivated
by tax avoidance or retroactive planning. Each beneficiary had reported the
beneficiary's share of corporate income or loss consistently with QSST
treatment, and the corporation and shareholders agreed to required
adjustments. The IRS granted relief under IRC § 1362(f), conditioned on all
five beneficiaries filing retroactive QSST elections within 120 days.

Ruling snapshot

• Question: May the corporation receive § 1362(f) relief after five trust
  beneficiaries failed to timely make QSST elections?
• Outcome: Approved, conditioned on five QSST elections within 120 days
• Key authorities: IRC §§ 1361(c)(2), 1361(d), and 1362(d), (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: 202046002 Third Party Communication: None
Release Date: 11/13/2020 Date of Communication: Not Applicable
Index Numbers: 1361.03-02, 1362.00-00,
1362.01-00, 1362.02-00, Person To Contact:
1362.02-02, 1362.04-00 -----------------------, ID No. -----------------
Telephone Number:
----------------------------------- --------------------
------------------------------------------------------ Refer Reply To:
-------------------- CC:PSI:03
-------------------------------- PLR-104577-20
Date:
August 18, 2020

Legend:

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

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

Trust 1 = --------------------------------------------------------------------------------
---------------------------------

Trust 2 = --------------------------------------------------------------------------------
---------------------------------

Trust 3 = --------------------------------------------------------------------------------
-----------------------------------------

Trust 4 = --------------------------------------------------------------------------------
-----------------------------------------

Trust 5 = --------------------------------------------------------------------------------
-------------------------------------------------

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

PLR-104577-20 2

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

C = -----------------------

D = -------------------------

E = -----------------------------

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

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

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

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

This letter responds to a letter dated December 18, 2019, and subsequent
correspondence, submitted on behalf of X by its authorized representative, requesting
inadvertent termination relief pursuant to § 1362(f) of the Internal Revenue Code.

                                                   Facts

The information submitted states that X, a State corporation, elected to be an S
corporation effective Date 1. On Date 2, separate share trusts of Trust, Trust 1, Trust 2,
Trust 3, Trust 4, and Trust 5, acquired shares of X stock. X represents that Trust 1,
Trust 2, Trust 3, Trust 4, and Trust 5 (collectively the Trusts) satisfied the qualified
subchapter S trust (QSST) requirements under § 1361(d)(3). However, A, B, C, D, and
E, the income beneficiary of Trust 1, Trust 2, Trust 3, Trust 4 and Trust 5, respectively,
failed to make an election under § 1361(d)(2) to treat their respective trust as a QSST
effective Date 2. Therefore, X’s S corporation election terminated on Date 2.

X represents that the failure to file QSST elections for the Trusts was inadvertent and
was not motivated by tax avoidance or retroactive tax planning. X represents that A, B,
C, D, and E reported their respective share of X’s income (or loss) consistent with the
treatment of each trust as a QSST on all affected returns. Finally, X and its
shareholders agree to make any adjustments consistent with the treatment of X as an S
corporation as may be required by the Secretary.
PLR-104577-20 3

                                 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) defines a “small business corporation” as 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 one
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(d)(3) defines a QSST as a trust, (A) the terms of which require that
(i) during the life of the current income beneficiary, there shall be only one income
beneficiary of the trust, (ii) any corpus distributed during the life of the current income
beneficiary may be distributed only to such beneficiary, (iii) the income interest of the
current income beneficiary in the trust shall terminate on the earlier of such beneficiary’s
death or the termination of the trust, and (iv) upon the termination of the trust during the
life of the current income beneficiary, the trust shall distribute all of its assets to such
beneficiary, and (B) all of the income (within the meaning of section 643(b)) of which is
distributed (or required to be distributed) currently to one individual who is a citizen or
resident of the United States.

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) — (A) such trust shall be treated as a
trust described in § 1361(c)(2)(A)(i) and, (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 1361(d)(2)(A) provides that a beneficiary of a QSST (or his legal representative)
may elect to have § 1361(d) apply.

Section 1.1361-1(j)(6)(ii) of the Income Tax Regulations provides that the current
income beneficiary of the trust must make the election under § 1361(d)(2) by signing
and filing, with the service center with which the S corporation files its income tax return,
the applicable form or a statement including the information listed in § 1.1361-1(j)(6)(ii).

Section 1362(d)(2)(A) provides that 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
PLR-104577-20 4

corporation is an S corporation) such corporation ceases to be a small business
corporation.

Section 1362(f) provides, in relevant part, that if (1) an election under § 1362(a) by any
corporation was terminated under § 1362(d)(2) or (3), (2) the Secretary determines that
the circumstances resulting in such termination were inadvertent, (3) no later than a
reasonable period of time after discovery of the circumstances resulting in the
termination, steps were taken so that the corporation for which the termination occurred
is a small business corporation, and (4) the corporation for which the termination
occurred and each person who was a shareholder in the corporation at any time during
the period specified pursuant to § 1362(f), agrees to make any adjustments (consistent
with the treatment of the corporation as an S corporation) as may be required by the
Secretary with respect to the period, then, notwithstanding the circumstances resulting
in the termination, the corporation will be treated as an S corporation during the period
specified by the Secretary.

                                    Conclusion

Based solely on the facts submitted and representations made, we conclude that X’s S
corporation election terminated on Date 2 when the Trusts became ineligible S
corporation shareholders. We further conclude that the termination constituted 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 Date
2 and thereafter, provided that X’s S corporation election was valid and was not
otherwise terminated under § 1362(d).

This ruling is contingent on A, B, C, D, and E each filing a QSST election for their
respective trust effective Date 2, with the appropriate service center within 120 days
from the date of this letter. A copy of this letter should be attached to each QSST
election.

Except as specifically ruled upon above, we express or imply no opinion concerning the
federal tax consequences of the facts of this case under any other provision of the
Code. Specifically, we express or imply no opinion regarding X’s eligibility to be an S
corporation, or the Trusts’ eligibility to be QSSTs.

This ruling is directed only to the taxpayer that requested it. According to § 6110(k)(3),
this ruling may not be used or cited as precedent.
PLR-104577-20 5

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.

Pursuant to the power of attorney on file with this office, we are sending a copy of this
letter to your authorized representatives.

                                  Sincerely,



                                  ______________________________
                                  Mary Beth Carchia
                                  Senior Technician Reviewer, Branch 3
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

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