Inadvertent Terminations

Internal Revenue Service
Number: 201644007
Release Date: 10/28/2016
Department of the Treasury
Washington, DC 20224
Third Party Communication: None
Date of Communication: Not Applicable
Index Number: 1362.04-00, 1362.02-02,
1361.03-02
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LEGEND
X = ---
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A = ---
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B = ---
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Person To Contact:
---, ID No. ---
Telephone Number:
---
Refer Reply To:
CC:PSI:B01
PLR-103896-16
Date:
July 28, 2016
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Trust =
---
Date 1= ---
Date 2= ---
Date 3= ---
Date 4= ---
Date 5= ---
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Court =
State = ---
PLR-103896-16 2
Dear ---:
This responds to a letter signed December 14, 2015, and subsequent correspondence, submitted on behalf of X by X’s authorized representative, requesting relief under § 1362(f) of the Code.

# FACTS

According to the information submitted and representations within, X was incorporated on Date 1 and elected to be taxed as an S corporation effective Date 2, under the laws of State.
A, a shareholder of X, died on Date 3. A’s shares in X were transferred to Trust on Date
4 for the benefit of B, a minor. Trust was intended to be a qualified subchapter S trust
(QSST). However, the guardian of B failed to timely file a QSST election for Trust.
Further, Trust did not meet the requirements to be a QSST. Thus, X’s S corporation election terminated on Date 4 when X stock was transferred to Trust, an ineligible shareholder. On Date 5, Court of State filed an order approving amendments to Trust to qualify Trust as a QSST.
X represents that the termination of X’s S election was inadvertent and was not motivated by a tax avoidance motive or retroactive tax planning. Lastly, X represents that X and its shareholders agree to make any adjustments consistent with 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 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(d)(1) provides that a QSST whose beneficiary makes an election under
§ 1362(d)(2) will be treated as a trust described in § 1361(c)(2)(A)(i), and the QSST’s beneficiary will be treated as the owner (for purposes of § 678(a)) of that portion of the QSST’s S corporation stock to which the election under § 1361(d)(2) applies. Under PLR-103896-16 3 § 1361(d)(2)(A), a beneficiary of a QSST may elect to have § 1361(d) apply. Under § 1361(d)(2)(D), this election will be effective up to 15 days and two months before the date of the election.
Section 1361(d)(3) provides that for purposes of § 1361(d), 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 one income beneficiary of the trust; (ii) any corpus distributed during the life of the current 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 that beneficiary; and (B) all of the income (within the meaning of § 643(b)) of which is distributed (or required to be distributed) currently to one individual who is a citizen or resident of the United States.
Section 1.1361-1(j)(6)(ii) of the Income Tax Regulations, provides that the current income beneficiary of the trust must make the election by signing and filing with the service center with which the corporation files its income tax 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 1st day of the 1st 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 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 ineffectiveness or termination, such corporation shall be treated as an S corporation during the period specified by the Secretary.
Rev. Rul. 93-79, 1993-2 C.B. 269, provides that a state court order that reforms a trust to meet the requirements of QSST is recognized prospectively.

# CONCLUSION

PLR-103896-16 4
Based solely on the facts submitted and the representations made, we conclude that
X’s S corporation election terminated on Date 4 when stock was transferred to Trust, an ineligible shareholder. We further conclude that the termination of X’s S election on Date 4 was inadvertent within the meaning of § 1362(f). Pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S corporation from Date 4 and thereafter, provided that X’s S election is valid and not otherwise terminated under § 1362(d).
This relief is contingent upon the guardian of B, the current income beneficiary of Trust, filing a QSST election for Trust effective Date 5 within 120 days from the date of this letter. A copy of this letter should be attached to the 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 Trust’s eligibility as a QSST.
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.
Pursuant to the power of attorney on file with this office, we are sending a copy of this letter to your authorized representative.
Sincerely,
Faith Colson
Faith Colson
Senior Counsel, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosures (2)
Copy of this letter
Copy of this letter for section 6110 purposes cc: