Inadvertent Terminations

Department of the Treasury
Internal Revenue Service
Number: 201739007
Washington, DC 20224
Third Party Communication: None
Release Date: 9/29/2017
Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
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Legend
X
State
Year
D1
D2
D3
D4
D5
D6
D7
D8
D9
Shareholder
Income Beneficiary
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Refer Reply To:
CC:PSI:B03
PLR-109007-17
Date:
June 27, 2017
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PLR-109007-17 2
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Trust1 = ---
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Trust2 = ---
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Dear ---:
This letter responds to a letter dated March 10, 2017, 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 was organized under the laws of State in
Year and elected to be an S corporation effective D1. On D2 and D3, Shareholder transferred shares of X to Trust1. Trust1 was a grantor trust until D4, when Shareholder died. Trust1 continued to own shares of X until D6, a date that is more than two years subsequent to Shareholder’s death. On D7, the trustee of Trust1 transferred its shares of X to Trust2. On D8, Trust2 filed an election to be treated as a qualified subchapter S trust (QSST). However, the terms of Trust2 did not meet the requirements to make an election to be treated as a QSST until it was modified on D9.
Because shares of X remained in Trust1 more than two years after Shareholder’s death, Trust1 was no longer a permitted shareholder on D5. Therefore, on D5, X’s S corporation election terminated. In addition, Trust2 was not a permitted shareholder on D7, when shares of X were transferred to Trust2. Therefore, if X’s S corporation election had not terminated on D5, it would have terminated on D7.
X represents that the termination was not motivated by tax avoidance or retroactive tax planning. X further represents that it has filed consistently as an S corporation since D1. X and its shareholders have agreed to make any adjustments that the Commissioner may require, consistent with the treatment of X as an S corporation.

# LAW AND ANALYSIS

Section 1362(a) 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.
PLR-109007-17 3
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) provides that the term “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 one 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 1 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.
Section 1361(c)(2)(A)(ii) provides that a trust that was described in
§ 1361(c)(2)(A)(i) immediately before the death of the deemed owner and that continues in existence after the owner’s death may be a shareholder, but only for the two-year period beginning on the day of the deemed owner’s death.
Section 1361(d)(1) provides that a QSST whose beneficiary makes an election under § 1361(d)(2) will be treated as a trust described in § 1361(c)(2)(A)(i), and the beneficiary of such trust shall be treated as the owner (for purposes of § 678(a)) 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(d)(2)(A) provides that an election under § 1362(a) will 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(d)(2)(B) provides that any termination under § 1362(d)(2)(A) is effective on and after the date of cessation.
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 the termination were inadvertent, (3) no later than a reasonable period of time after discovery of the circumstances resulting in the termination, steps were taken (A) so that the corporation 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 the termination, the corporation will be treated as an S corporation during the period specified by the Secretary.
PLR-109007-17 4

# CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that X’s S corporation election terminated on D5, and would have terminated again on D7, because of its ineligible shareholders. We also conclude that the circumstances resulting in the terminations were inadvertent within the meaning of § 1362(f).
Accordingly, under § 1362(f), X will be treated as an S corporation from D5 and thereafter, provided X’s S corporation election was otherwise valid and has not otherwise terminated under § 1362(d) for reasons not addressed in this letter.
Except as specifically ruled above, we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provisions of the Code. Specifically, we express no opinion regarding X’s eligibility to be an S corporation.
This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
In accordance with a power of attorney on file with this office, we are sending a copy of this letter to X’s authorized representative.
Sincerely,
Brad Poston
Senior Counsel, Branch 3
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosures (2):
Copy of this letter
Copy for § 6110 purposes cc: