Inadvertent Terminations

Internal Revenue Service
Number: 201936007
Release Date: 9/6/2019
Index Numbers: 1362.00-00, 1362.04-00
---
---
---
---
LEGEND
X = ---
---
Department of the Treasury
Washington, DC 20224
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
---, ID No. ---
Telephone Number:
---
Refer Reply To:
CC:PSI:B03
PLR-132654-18
Date: May 15, 2019
Trust = --- ---
-
---
State = ---
Date1 = ---
Date2 = ---
Date3 = ---
$n = ---
Year = ---
Dear ---:
This letter responds to a letter dated October 1, 2018, and subsequent correspondence, submitted on behalf of X, requesting a ruling under § 1362(f) of the Internal Revenue Code (the Code).
PLR-132654-18 2

# FACTS

The information submitted states that X was incorporated under the laws of State on Date 1 and elected to be treated as an S corporation effective Date 2.
On Date 2, Trust owned shares of X stock. X represents that Trust qualifies as an electing small business trust (ESBT) within the meaning of § 1361(e). However, the trustee of Trust failed to make an election under § 1361(e)(3) to treat Trust as an ESBT.
As a result, X's S corporation election was ineffective on Date 2.
X represents that the failure to file an ESBT election and resulting ineffective S corporation election were inadvertent and were not motivated by tax avoidance or retroactive tax planning. Further, X and its shareholders agree to make any adjustments consistent with the treatment of X as an S corporation as may be required by the Secretary.

# LAW

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) 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 one class of stock.
Section 1361(c)(2)(A)(v) provides that, for purposes of § 1361(b)(1)(B), an ESBT may be an S corporation shareholder.
Section 1361(e)(1)(A) provides that 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 (IV) 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.
PLR-132654-18 3
Section 1.1361-1(m)(2)(i) of the Income Tax Regulations provides, in relevant part, that the trustee of an ESBT 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 1362(a)(1) 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 1362(f) provides, in relevant 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 to obtain shareholder consents, (2) the Secretary determines that the circumstances resulting in such ineffectiveness were inadvertent; (3) no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness, steps were taken so that the corporation for which the election was made is a small business corporation; and (4) the corporation for which the election was made, 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, 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 X's S corporation election was not effective on Date 2 when the trustee of Trust failed to file an ESBT election under § 1361(e)(3). We further conclude that the ineffectiveness of X's S corporation election was inadvertent within the meaning of § 1362(f). Therefore, under § 1362(f) X will be treated as an S corporation on and after Date 2, provided X's S corporation election was otherwise valid and not otherwise terminated under § 1362(d).
This ruling is contingent on the following: (1) the trustee of Trust filing within 120 days of the date of this letter an ESBT election effective Date 2 with the appropriate service center; and (2) Trust filing within 120 days of the date of this letter any amended returns and making adjustments to properly reflect the treatment of Trust as an ESBT for Year taxable year.
Furthermore, as an adjustment under § 1362(f)(4), a payment of $n and a copy of this letter must be sent to the following address: Internal Revenue Service, Kansas City Service Center, 333 W. Pershing Road, Kansas City, MO 64108, Stop 7777, PLR-132654-18 4 Manual Deposit. This payment and a copy of this letter must be sent no later than Date 3.
If the above conditions are not met, then this ruling is null and void. In addition, if these conditions are not met, X must send notification that its S corporation election has terminated to the service center with which X's S corporation election was filed.
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 to be an ESBT.
This ruling is directed only to the taxpayer who requested it. According to
§ 6110(k)(3) of the Code, 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 the power of attorney on file with this office, we are sending a copy of this letter to your authorized representative.
Sincerely,
Mary Beth Carchia
Senior Technician Reviewer, Branch 3
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosures: Copy of this letter
Copy of this letter for § 6110 purposes