S corporation keeps its status after a shareholder trust misses its QSST election

Plain-English summary

An S corporation's stock was transferred to a trust. For the trust to be an eligible S corporation shareholder, the beneficiary had to file a qualified subchapter S trust (QSST) election, but that election was never filed on time. That made the trust an ineligible shareholder and terminated the corporation's S election. The corporation said the trust otherwise met all QSST requirements, that it and its shareholders kept filing as if the S election never ended, and that the lapse was inadvertent and not for tax avoidance. The IRS agreed the termination was inadvertent under § 1362(f) and let the corporation continue as an S corporation without a break, on the condition that the trust's income beneficiary files the QSST election within 120 days.

Ruling snapshot

• Question: May the corporation keep its S election after its shareholder trust failed to file a timely QSST election?
• Outcome: Approved, subject to a corrective QSST election within 120 days
• Key authorities: IRC §§ 1361(d), 1362(f); Treas. Reg. § 1.1361-1(j)(6)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202428003 Third Party Communication: None
Release Date: 7/12/2024 Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.01-00,
1362.01-02, 1362.02-00, Person To Contact:
1362.02-02, 1362.04-00 ----------------------------, ID No. --------------
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------------------------------ Refer Reply To:
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Date:
April 10, 2024

LEGEND

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

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

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

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

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

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

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

    This letter responds to a letter dated October 11, 2023, and subsequent

correspondence, submitted on behalf of X by its authorized representatives, requesting
a ruling under § 1362(f) of the Internal Revenue Code (the Code).
PLR-121534-23 2

                                      FACTS


   The information submitted states that X was incorporated under the laws of State

on Date 1. X elected to be an S corporation effective on Date 2. On Date 3, shares of
X were transferred to Trust. A Qualified Subchapter S Trust (QSST) election, effective
Date 3, was not timely filed for Trust. Accordingly, Trust was an ineligible shareholder
of X and X's S corporation election terminated on Date 3.

   X represents that Trust has at all times since Date 3 met the requirements of an

QSST within the meaning of § 1361(d). X represents that X and it shareholders have
continued to treat themselves as though X’s S corporation election did not terminate
on Date 3. In addition, X represents that the termination of its S corporation status was
inadvertent and was not motivated by tax avoidance or retroactive tax planning.
Further, X and its shareholders agree to make any adjustments required as a condition
of obtaining relief for the termination of X's election as provided under § 1362(f) of the
Code that may be required by the Secretary.

                              LAW AND ANALYSIS

   Section 1362(a) of the Code 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 1361(a)(1) defines an “S corporation” as a small business corporation for

which an election under § 1362(a) is in effect for the taxable year.

   Section 1361(b)(1) provides that a small business corporation means a domestic

corporation which is not an ineligible corporation for such year and which does not,
among other limitations, 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.

    Section 1361(c)(2)(A)(i) provides that 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 an S corporation shareholder.

    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), such trust shall be treated as a trust
described in § 1361(c)(2)(A)(i) and 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
the S corporation with respect to which the election under § 1361(d)(2) is made.

  Section 1361(d)(3) defines a QSST as a trust all of the income (within the

meaning of § 643(b)) of which is distributed (or required to be distributed) currently to
PLR-121534-23 3

one individual who is a citizen or resident of the United States. In addition, the terms of
the trust must 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.

    Section 1.1361-1(j)(6)(ii) of the Income Taxation 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 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 a corporation is an S corporation) such corporation ceases to be a small business
corporation. Section 1362(d)(2)(B) provides that the termination shall be effective on
and after the date of cessation.

    Section 1362(f) provides, in pertinent 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 terminated under § 1362(d)(2) or (3), (2) the Secretary
determines that the circumstances resulting in such ineffectiveness or termination were
inadvertent, (3) no later than a reasonable period of time after discovery of the event
resulting in the ineffectiveness or termination, steps were taken (A) so that the
corporation for which the election was made or the termination occurred is a small
business corporation, and (4) the corporation, and each person who was a shareholder
of the corporation at any time during the period specified pursuant to § 1362(f), agrees
to make such adjustments (consistent with the treatment of the 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 or termination, the
corporation shall be treated as an S corporation during the period specified by the
Secretary.
PLR-121534-23 4

                                  CONCLUSION

   Based solely on the facts submitted and the representations made, we conclude

that X's S corporation status inadvertently terminated within the meaning of § 1362(f) on
Date 3 because Trust was an ineligible shareholder. Pursuant to the provisions of
§ 1362(f), X will be treated as an S corporation from Date 3 and thereafter, provided X's
S corporation election is otherwise effective and not terminated under § 1362(d).

    This letter ruling is subject to the condition that within 120 days from the date of

this letter, the income beneficiary of Trust must file a QSST election effective Date 3
with the appropriate service center. A copy of this letter should be attached to the
QSST 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. Specifically, we express or imply no opinion regarding whether X is otherwise
eligible to be an S corporation or whether Trust is otherwise eligible to be a QSST.

  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.

   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 a power of attorney on file with this office, we are sending a copy of

this letter to your authorized representative.

                                    Sincerely,


                                    ____/S/____________________
                                    Laura C. Fields
                                    Branch Chief, Branch 1
                                    Office of the Associate Chief Counsel
                                    (Passthroughs & Special Industries)

Enclosure
Copy for § 6110 purposes.
PLR-121534-23 5

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