Ceases to be Small Business Corporation

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201922021
Release Date: 5/31/2019
Index Number: 1361.03-03, 1362.02-02
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B01
PLR-118898-18
Date:
December 6, 2018
LEGEND
X = ---
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A = ---
Trust 1= ---
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Trust 2= ---
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Trust 3= ---
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Date 1= ---
Date 2= ---
Date 3= ---
Date 4= ---
Date 5= ---
PLR-118898-18 2
State = ---
Dear ---:
This responds to a letter dated June 4, 2018, and supplemental correspondence, submitted on behalf of X, by X’s authorized representative, requesting relief under section 1362(f) of the Internal Revenue Code (the Code).

# FACTS

According to the information submitted and representations within, X was formed on
Date 1 and made a timely S corporation election effective Date 2, under the laws of
State.
Prior to her death, A, an eligible shareholder, owned shares in X. On Date 3, A died.
Pursuant to A’s Will, on Date 4, A’s shares were transferred to Trust 1, Trust 2 and
Trust 3. Trust 1,Trust 2 and Trust 3 were eligible shareholders of X from Date 4 to Date
5 under § 1361(c)(2)(A)(iii).
X represents that Trust 1, Trust 2, and Trust 3 were eligible to make an Electing Small
Business Trust (ESBT) elections as of Date 5, however, the trustees of Trust 1, Trust 2, and Trust 3 failed to file ESBT elections. As a result, X’s S corporation election terminated as of Date 5.
X represents that the circumstances resulting in the termination of X’s S corporation election and the failure to make timely ESBT elections were inadvertent and not motivated by tax avoidance or retroactive tax planning. X represents that other than the failure to file ESBT elections for Trust 1, Trust 2, and Trust 3 on Date 5, X has qualified as a small business corporation at all times since its election on Date 2. Lastly, X and its shareholders agree to make any adjustments required as a condition of obtaining relief under § 1362(f) that may be required by the Secretary.

# LAW AND ANALYSIS

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 the year.
Section 1361(b)(1) provides that the terms “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, PLR-118898-18 3 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)(iii) provides that, for purposes of § 1361(b)(1)(B), a trust with respect to stock transferred to it pursuant to the terms of a will is a permitted shareholder, but only for the 2-year period beginning on the day on which such stock is transferred to it.
Section 1361(c)(2)(A)(v) provides that for purposes of § 1361(b)(1)(B), an ESBT is a permissible shareholder.
Section 1361(e) an ESBT means any trust if (i) such trust does not have as a beneficiary any person other than (I) an individual, (II) an estate, (III) an organization described in § 170(c)(2), (3), (4), or (5), or an organization described in § 170(c)(1) which holds a contingent interest in such trust and is not a potential current beneficiary,

(ii) no interest in such trust was acquired by purchase, and (iii) an election under §
1361(e) applies to such trust.
Section 1361(e)(3) provides that an election under § 1361(e) shall be made by the trustee. Any such election shall apply to the taxable year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the Secretary.
Section 1.1361-1(m)(2)(i) provides that the trustee of a trust must make the ESBT election by signing and filing, with the service center where the S corporation files its income tax return, a statement that meets the requirements of § 1.1361-1(m)(2)(ii).
Section 1.1361-1(m)(2)(iii) provides that the trustee of an ESBT must file the ESBT election within the time requirements prescribed in § 1.1361-1(j)(6)(iii)(generally within the 16-day-and-2-month period beginning on the day that the stock is transferred to the trust).
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) 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 such ineffectiveness or termination, steps were taken so that the corporation for which the termination occurred is a small business corporation; and (4) the corporation for which PLR-118898-18 4 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

Based solely on the facts submitted and the representations made, we conclude that the failure of Trust 1, Trust 2, and Trust 3 to file ESBT elections effective Date 5 caused an inadvertent termination of X’s S corporation election within the meaning of § 1362(f) on Date 5. Pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S corporation beginning on and after Date 5, unless X's S corporation election is otherwise terminated under § 1362(d).
This letter ruling is contingent upon the filing of ESBT elections within 120 days from the date of this letter effective Date 5 for Trust 1, Trust 2, and Trust 3 with the appropriate service center. A copy of this letter should be attached to the ESBT elections. This letter ruling is also contingent upon X and its shareholders filing, within 120 days from the date of this letter, original and amended returns for all open years consistent with the relief in this letter.
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 1, Trust 2, and Trust 3 were or are otherwise eligible to be ESBTs.
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.
PLR-118898-18 5
Pursuant to the power of attorney on file with this office, we are sending a copy of this letter to your authorized representatives.
Enclosures (2)
Copy of this letter
Sincerely,
Faith P. Colson
Faith P. Colson
Senior Counsel, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Copy of this letter for section 6110 purposes