Missed QSST election received inadvertent termination relief

Plain-English summary

A trust acquired shares in an S corporation and met the substantive requirements for qualified subchapter S trust status, but no timely QSST election was made. The trust therefore became an ineligible shareholder and terminated the corporation's S election on the acquisition date. The corporation represented that the failure was inadvertent, not tax-motivated, and that all returns had been filed consistently with continued S corporation and QSST treatment. The IRS allowed the corporation to remain an S corporation from the termination date forward. Relief is contingent on the trust filing the QSST election effective on that date within 120 days.

Ruling snapshot

• Question: Was the S election termination caused by the missed QSST election eligible for inadvertent-termination relief?
• Outcome: approved, subject to a QSST election within 120 days
• Key authorities: IRC §§ 1361(c) and (d) and 1362(f)

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202410002                                             Third Party Communication: None
 Release Date: 3/8/2024                                        Date of Communication: Not Applicable
 Index Number: 1362.04-00
                                                               Person To Contact:
 ----------------------------------                            ----------------------, ID No. -----------------
 --------------------------------------------                  Telephone Number:
 ----------------------------                                  --------------------
 ----------------------------------------                      Refer Reply To:
                                                               CC:PSI:B03
                                                               PLR-112184-23
                                                               Date:
                                                               December 11, 2023


Legend

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

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

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

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

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

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


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

        This letter responds to a letter dated May 30, 2023, submitted on behalf of X by
its authorized representative requesting a ruling under § 1362(f) of the Internal Revenue
Code (Code).

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

       On Date 3, Trust acquired shares in X. X represents that Trust met the
requirements to be treated as a qualified subchapter S trust (QSST) as described in
§ 1361(d), but a timely election to treat Trust as a QSST was not made. Therefore,
Trust was not an eligible S corporation shareholder and as a result, X’s S corporation
election terminated on Date 3.

PLR-112184-23                                 2


       X represents that the circumstances resulting in the termination of its S
corporation election were inadvertent and were not motivated by tax avoidance or
retroactive tax planning. Additionally, X represents that X and its shareholders filed all
returns consistent with X’s status as an S corporation and Trust’s status as a QSST. X
and its shareholders agreed to make any adjustments (consistent with the treatment of
X as an S corporation) as may be required by the Secretary.

                                  LAW AND ANALYSIS

      Section 1362(a) provides that a small business corporation may elect to be an S
corporation.

        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)(B) provides that a “small business corporation” means 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 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 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(c)(2)(B)(i) provides that for purposes of § 1361(b)(1), in
the case of a trust described in § 1361(c)(2)(A)(i), the deemed owner shall be treated as
the shareholder.

       Section 1361(d)(1) provides, in part, 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), (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 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 of the corporation at any
time during the period specified under § 1362(f), agrees to make the adjustments

PLR-112184-23                                 3

(consistent with the treatment of the corporation as an S corporation) as may be
required by the Secretary for that period, then, notwithstanding the circumstances
resulting in such termination, the corporation shall 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 3, when Trust became an ineligible
shareholder. We further conclude that the termination of X’s S election was inadvertent
within the meaning of § 1362(f). Therefore, pursuant to the provisions of § 1362(f), X
will be treated as an S corporation effective Date 3, and thereafter, provided X’s S
corporation election is valid and not otherwise terminated under § 1362(d).

        This relief is contingent on Trust filing a QSST election with the appropriate
service center, within 120 days from the date of this letter effective Date 3. A copy of
this letter should be attached to the election.

       Except as specifically ruled 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 and the regulations thereunder. Specifically, we express or imply no opinion
regarding X’s eligibility to be an S corporation or Trust's eligibility to be treated as 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.

       This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)
of the Code provides that it may not be used or cited as precedent.

PLR-112184-23                               4

      In accordance with the power of attorney on file with this office, we are sending a
copy of this letter to X’s authorized representative.


                                                Sincerely,

                                                 Associate Chief Counsel
                                                (Passthroughs & Special Industries)


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


Enclosure
   Copy for § 6110 purposes


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