Three late QSST elections do not terminate S corporation status

Plain-English summary

After a shareholder died, one stock-holding trust divided into three trusts, two of which required qualified subchapter S trust elections, and a separate trust also later required a QSST election. None of the three elections was filed on time, making the trusts ineligible shareholders and terminating the corporation's S election. The corporation represented that every trust otherwise met the QSST requirements, the failures were inadvertent and unrelated to tax avoidance or retroactive planning, and all returns had consistently treated the corporation as an S corporation. The corporation and its shareholders also agreed to make any required adjustments. The IRS granted inadvertent-termination relief and treated the corporation as continuously maintaining S status from the first termination date. Relief was conditioned on filing QSST elections for all three trusts within 120 days.

Ruling snapshot

• Question: Could three late QSST elections be cured without interrupting the corporation's S status?
• Outcome: Approved, conditioned on filing all three QSST elections within 120 days
• Key authorities: IRC §§ 1361(c) and (d), 1362(d)(2) and (f), 643(b), 663(c), and 678(a)

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202140001                                             Third Party Communication: None
 Release Date: 10/8/2021                                       Date of Communication: Not Applicable
 Index Number: 1362.01-01, 1362.04-00,
               1361.03-02                                      Person To Contact:
                                                               --------------, ID No. -----------------
 --------------------------------------------------            Telephone Number:
 -----------------------------------                           ---------------------
 ---------------------                                         Refer Reply To:
 ----------------------------------                            CC:PSI:B01
                                                               PLR-100177-21
                                                               Date:
                                                               June 15, 2021
Legend

 X              =    ------------------------------------------
                     ------------------------
 A              =    ------------------------
                     ------------------------
 B              =    -----------------------------
                     -------------------------
 State          =    -------------
 Date 1         =    ------------------------------
 Date 2         =    --------------------------
 Date 3         =    -----------------------
 Date 4         =    --------------------------
 Date 5         =    --------------------------
                     ------------------------------------------ -
 Trust 1        =    -------------------------------------------
                     -----------------------
                     -------------------------------------------
 Trust 2        =    -------------------------------------------
                     -----------------------
                     -------------------------------------------
 Trust 3        =    -------------------------------------------
                     ----------------------
                     -------------------------------------------
 Trust 4        =    ---------------------
                     ----------------------
                     -------------------------------------------
 Trust 5        =    ----------------------

Dear ---------------:
PLR-100177-21                                2

This letter responds to a letter dated December 15, 2020, and subsequent
correspondence, submitted on behalf of X by its authorized representatives, requesting
inadvertent termination relief under § 1362(f) of the Internal Revenue Code (Code).

                                           Facts

According to the information submitted and representations within, X was organized on
Date 1, under the laws of State. Effective Date 1, X elected to be taxed as an S
corporation.

On Date 2, A and B established Trust 1. Shares of X were owned by Trust 1 which X
represents was a permissible S corporation shareholder under § 1361(c)(2)(A)(i).

On Date 3, A died. Pursuant to the trust agreement governing Trust 1, upon A's death
Trust 1 was to be divided into three separate trusts, Trust 2, Trust 3 and Trust 4. X
represents that Trust 2 was a permissible S corporation shareholder under §
1361(c)(2)(A)(i); however, a qualified subchapter S trust (QSST) election was required
for both Trust 3 and Trust 4 to be permissible S corporation shareholders.

On Date 4, A established Trust 5, which X represents was a permissible S corporation
shareholder under § 1361(c)(2)(A)(i). X also represents that following A’s death, a QSST
election was required for Trust 5 to be a permissible S corporation shareholder on or
before Date 5 (within two years of A’s death).

X represents that Trust 3, Trust 4 and Trust 5 were intended to qualify as QSSTs, except
that no QSST elections had been timely filed on behalf of these trusts effective on Date
3 for Trust 3 and Trust 4 and on or before Date 5 for Trust 5, thereby causing X’s S
corporation election to terminate. X represents that Trust 3, Trust 4 and Trust 5 otherwise
always have met the requirements to be QSSTs.

X represents that the circumstances resulting in the failure to file the QSST elections for
Trust 3, Trust 4 and Trust 5 were inadvertent and not motivated by tax avoidance or
retroactive tax planning. X further represents that X has filed its income tax returns
consistent with having a valid S corporation election in effect for all taxable years since X
elected to be an S corporation. X and its shareholders have agreed to make such
adjustments (consistent with the treatment of X as an S corporation) as 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
PLR-100177-21                                 3

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) 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)(1) provides that in the case of a QSST with respect to 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 is 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)(3) provides that the term “qualified subchapter S trust” means a trust (A)
the terms of which require that (i) during the life of the current income beneficiary, there
shall be only 1 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 1 individual who is a citizen
or resident of the United States. A substantially separate and independent share of a trust
within the meaning of 663(c) shall be treated as a separate trust for purposes of §
1361(d)(3) and § 1361(c).

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated
whenever (at any time on or after the 1st day of the 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) or (3) or § 1361(b)(3)(C); (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
PLR-100177-21                                4

Based solely on the information submitted and the representations made, we conclude
that X’s S corporation election terminated on Date 3, when Trust 3 and Trust 4 became
ineligible shareholders. We also conclude that if X’s S corporation election had not
already terminated on Date 3, it would have terminated on Date 4 when Trust 5 became
an ineligible shareholder. We further conclude that the termination on Date 3 and Date 4
was inadvertent within the meaning of § 1362(f). Accordingly, under § 1362(f), X will be
treated as continuing to be an S corporation on and after Date 3, provided that X’s S
corporation election was valid and not otherwise terminated under § 1362(d). This ruling
is contingent upon the filing of a QSST election for Trust 3, Trust 4, Trust 5, respectively,
within 120 days of 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 whether Trust 3, Trust 4, Trust 5 are otherwise valid QSSTs.

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 your authorized representatives.


                                       Sincerely,


                                       Laura Fields
                                       Laura Fields
                                       Chief, Branch 1
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)



Enclosure

       Copy for § 6110 purposes


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