Four missed ESBT elections receive inadvertent S corporation relief

Plain-English summary

Two shareholders transferred S corporation shares to four trusts whose trustees failed to make timely electing small business trust (ESBT) elections. The missed elections caused the corporation's S status to terminate on the transfer date, even though the trusts represented that they otherwise met the ESBT requirements. The corporation represented that the failure was inadvertent, was not tax-motivated, and had been reported consistently with continued S status. The IRS granted relief under IRC § 1362(f), treating the corporation as an S corporation continuously from the transfer date. Relief required the trustees to file retroactive ESBT elections, file or amend trust returns, make required adjustments, and submit a separate specified payment for each trust by the redacted deadline.

Ruling snapshot

• Question: Can the corporation retain continuous S status after four trustees failed to file timely ESBT elections?
• Outcome: Approved, subject to election, return, adjustment, and payment conditions
• Key authorities: IRC §§ 1361(e) and 1362(f); Treas. Reg. § 1.1361-1(m)(2)

Full text (IRS public release)

 Internal Revenue Service                                          Department of the Treasury
                                                                   Washington, DC 20224

 Number: 202110001                                                 Third Party Communication: None
 Release Date: 3/12/2021                                           Date of Communication: Not Applicable
 Index Number: 1361.00-00, 1361.03-00,
               1361.03-03, 1362.00-00,                             Person To Contact:
               1362.04-00                                          -----------------------, ID No. -----------------
                                                                   Telephone Number:
 --------------------------                                        --------------------
 ------------------------------------------------                  Refer Reply To:
 --------------------------                                        CC:PSI:03
 --------------------------------------                            PLR-100223-20
                                                                   Date:
                                                                   July 03, 2020




Legend

Company                    =         ---------------------------
-----------------------------------------------------------

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

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

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

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

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

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

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

Date 1                     =        -------------------------
PLR-100223-20                                           2

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

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

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

a                          =   -------------

b                          =   ------------

c                          =   ------------

d                          =   -------------


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

This letter responds to a letter dated December 6, 2019, and subsequent
correspondence, submitted on behalf of Company by its authorized representative,
requesting a ruling under §1362(f) of the Internal Revenue Code (Code).

                                                 Facts

The information submitted states Company was organized on Date 1, as a corporation
under the laws of State. Effective Date 2, Company elected to be taxed as an S
corporation.

On Date 3, A and B transferred shares of Company to Trusts 1, 2, 3, and 4 (collectively,
the Trusts). However, a timely election to treat each of the Trusts as an Electing Small
Business Trust (ESBT) was not made, causing Company’s S election to terminate on
Date 3.

Company represents that the Trusts have at all times met the requirements of an ESBT
within the meaning of section 1361(e), except that each trustee of the Trusts did not
make a timely ESBT election under section 1361(e)(3).

Company represents that upon discovering that its S election had terminated, Company
took corrective action by filing this request for relief. Company represents that the
circumstances resulting in the inadvertent termination and the failure to make timely
ESBT elections was inadvertent and not motivated by tax avoidance or retroactive tax
planning. Company further represents that it has filed its income tax returns consistent
with having a valid S election in effect for all taxable years since Company elected to be
an S corporation. Company represents that other than the failure to make a valid ESBT
election on Date 3, Company has qualified as a small business corporation at all times
since its election on Date 2. Lastly, Company and its shareholders agree to make any
PLR-100223-20                                 3

adjustments required as a condition of obtaining relief under §1362(f) that may be
required by the Secretary.

                                     Law and Analysis

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) 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)(v) provides that, for purposes of §1361(b)(1)(B), an ESBT may be
an S corporation shareholder.

Section 1361(e)(1)(A) provides that an ESBT means any trust if (i) such trust does not
have as a beneficiary any person other than (I) an individual, (II) an estate, (III) an
organization described in §170(c)(2), (3), (4), or (5), or (IV) an organization described in
§170(c)(1) which holds a contingent interest in such trust and is not a potential current
beneficiary; (ii) no interest in such trust was acquired by purchase; and (iii) an election
under §1361(e) applies to such trust.

Section 1361(e)(3) provides that an election under §1361(e) shall be made by the
trustee. Any such election shall apply to the taxable year of the trust for which made
and all subsequent taxable years of such trust unless revoked with the consent of the
Secretary.

Section 1.1361-1(m)(2)(i) of the Income Tax Regulations provides, in relevant part, that
the trustee of an ESBT must make the ESBT election by signing and filing, with the
service center where the S corporation files its income tax return, a statement that
meets the requirements of §1.1361-1(m)(2)(ii).

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(f) provides, in relevant part, that if (1) an election under §1362(a) by any
corporation 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, (2) the Secretary determines that the circumstances
resulting in such ineffectiveness were inadvertent; (3) no later than a reasonable period
PLR-100223-20                                  4

of time after discovery of the circumstances resulting in such ineffectiveness, steps
were taken so that the corporation for which the election was made is a small business
corporation; and (4) the corporation for which the election was made, and each person
who was a shareholder in such corporation at any time during the period specified
pursuant to §1362(f), agrees to make the adjustments (consistent with the treatment of
such 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, such corporation shall be treated as an S corporation during the period
specified by the Secretary.
                                        Conclusion

Based solely on the facts submitted and the representations made, we conclude that
Company’s S corporation election was not effective on Date 3 when the trustees of the
Trusts failed to file ESBT elections under §1361(e)(3). We further conclude that the
ineffectiveness of Company’s S election was inadvertent within the meaning of §1362(f).
Therefore, under §1362(f) Company will be treated as an S corporation on and after
Date 3, provided Company’s S corporation election was otherwise valid and not
otherwise terminated under §1362(d).

This ruling is contingent on the following: (1) the trustees of the Trust filing by Date 4
ESBT elections effective Date 3 with the appropriate service center; and (2) Trust filing
by Date 4 any amended returns and making adjustments to properly reflect the
treatment of Trusts as ESBTs.

Furthermore, as an adjustment under §1362(f), a payment of $a for Trust 1, $b for Trust
2, $c for Trust 3, and $d for Trust 4 and a copy of this letter ruling must be sent to the
following address:

Internal Revenue Service
Kansas City Service Center
333 W. Pershing Road
Kansas City, MO 64108
Stop 7777
Manual Deposit

The payment of this letter must be sent no later than Date 4.

If the above conditions are not met, then this ruling is null and void. In addition, if these
conditions are not met, Company must send notification that its S corporation election
has terminated to the service center with which Company’s S election was filed.

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 Company’s eligibility to be
an S corporation or whether the Trusts were or are otherwise eligible to be an ESBT.
PLR-100223-20                                5


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

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 X’s authorized representative.


                                      Sincerely,


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


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


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