Missed ESBT election receives inadvertent S corporation termination relief

Plain-English summary

A trust acquired stock in an S corporation and represented that it qualified as an electing small business trust (ESBT). The trustee failed to file the ESBT election, causing the corporation's S election to terminate on the acquisition date. The corporation represented that the failure and termination were inadvertent and not motivated by tax avoidance or retroactive planning. The IRS granted relief under IRC § 1362(f), allowing continuous S corporation treatment if the original election was otherwise valid. Relief required the trustee to file a retroactive ESBT election and an amended trust return within 120 days, and to make a specified payment within 45 days.

Ruling snapshot

• Question: Can the corporation retain continuous S status after the trustee inadvertently failed to file an ESBT election?
• Outcome: Approved, subject to election, return, 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: 202110008                                                Third Party Communication: None
 Release Date: 3/12/2021                                          Date of Communication: Not Applicable
 Index Numbers: 1362.00-00, 1362.04-00
                                                                  Person To Contact:
 ---------------------------------------                          --------------------, ID No. -----------------
 -------------------------------------------------------          Telephone Number:
 ---------------------------                                      --------------------
 -------------------------------------------                      Refer Reply To:
                                                                  CC:PSI:B03
                                                                  PLR-114334-20
                                                                  Date:
                                                                  December 03, 2020




LEGEND

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

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

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

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

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

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

$n         = ---------------

Year       = -------



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

This letter responds to a letter dated May 13, 2020, and subsequent information,
submitted on behalf of X by its authorized representative, requesting a ruling under
§ 1362(f) of the Internal Revenue Code (Code).

                                                     FACTS

The information submitted states that X, a State corporation created Date 1, elected to
be treated as an S corporation effective Date 2.
PLR-114334-20                                 2


On Date 3, Trust acquired shares of X stock. X represents that Trust qualifies as an
electing small business trust (ESBT) within the meaning of § 1361(e). However, the
trustee of Trust failed to make an election under § 1361(e)(3) to treat Trust as an ESBT.
As a result, X’s S corporation election terminated on Date 3.

X represents that the failure to file an ESBT election and resulting termination of its S
corporation election were inadvertent and were not motivated by tax avoidance or
retroactive tax planning. Further, 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.

                                            LAW

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)(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).
PLR-114334-20                                  3

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
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); (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 such
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 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 termination, 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
X’s S corporation election terminated on Date 3 when the trustee of Trust failed to file
an ESBT election under § 1361(e)(3). We further conclude that the termination of X’s S
corporation election was inadvertent within the meaning of § 1362(f). Therefore, under
§ 1362(f) X will be treated as continuing to be an S corporation on and after Date 3,
provided X’s S corporation election was otherwise valid and not otherwise terminated
under § 1362(d).

This ruling is contingent on the following conditions: (1) The trustee of Trust must file
within 120 days from the date of this letter an ESBT election effective Date 3 with the
appropriate service center; (2) Trust must file within 120 days from the date of this letter
an amended return for its Year taxable year to properly reflect the treatment of Trust as
an ESBT; and (3) As an adjustment under § 1362(f)(4), a payment of $n with a copy of
this letter must be sent to the following address within 45 days from the date of this
letter: Internal Revenue Service, Kansas City Submission Processing Campus, 333 W.
Pershing Road, Kansas City, MO 64108, Stop 7777, Attn: Manual Deposit;.

If the above conditions are not met, then this ruling is null and void. In addition, if these
conditions are not met, X must notify the service center with which it filed its S
corporation election that its election terminated on Date 3.

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 Trust’s eligibility to be an ESBT.
PLR-114334-20                                4


This ruling is directed only to the taxpayer who requested it. According to § 6110(k)(3)
of the Code, 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 your authorized representative.

                                             Sincerely,



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



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



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