Inadvertent Terminations

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202140005
Release Date: 10/8/2021
Index Number: 1362.00-00, 1362.04-00
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[Third Party Communication:
Date of Communication: Month DD, YYYY]
Person To Contact:
---, ID No. ---
Telephone Number:
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Refer Reply To:
CC:PSI:B3
PLR-101702-21
Date:
July 8, 2021
Legend
X = ---
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A = ---
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B = ---
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Trust = ---
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State = ---
Date 1 = ---
Date 2 = ---
Date 3 = ---
Dear ---:
This letter responds to a letter dated January 18, 2020, and subsequent correspondence, submitted on behalf of X by X’s authorized representative, requesting inadvertent termination relief under § 1362(f) of the Internal Revenue Code (Code).
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PLR-101702-21

# Facts

The information submitted states that X was incorporated under the laws of State on Date
1 and X elected to be an S corporation effective Date 1.
On Date 2, A transferred shares of X to Trust. A and his wife, B, intended that Trust qualify as an eligible S corporation shareholder under § 1361(c)(2)(A)(i). However, pursuant to the terms of Trust’s trust instrument, Trust was not treated as wholly owned by A and B for federal income tax purposes. As a result, X’s S corporation election terminated on Date 2.
On Date 3, Trust took remedial action and transferred its shares in X to a trust that X represents is an eligible shareholder under § 1361(c)(2)(A)(i).
X represents that the circumstances resulting in the termination of X’s S corporation election were inadvertent and not motivated by tax avoidance or retroactive tax planning. X further represents that since Date 1, X has filed all returns consistent with X’s status as an S corporation and the items of X attributable to Trust have been allocated to A and B as though A and B owned the X shares directly. X and its shareholders have agreed to make any adjustments the Commissioner may require, consistent with the treatment of X as an S corporation.

# 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) 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 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 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 paragraph (2) or (3) of § 1362(d), (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 termination, steps were taken so that the corporation is once more a small business corporation, and (4) the corporation and each person who was a shareholder of the 3 PLR-101702-21 corporation at any time during the period specified pursuant to § 1362(f), agrees to make any adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to the period, then, notwithstanding the circumstances resulting in the termination, the corporation will be treated as continuing to be an S corporation during the period specified by the Secretary.

# Conclusion

Based solely on the information submitted and the representations made, we conclude that X’s S corporation election terminated on Date 2 when the X stock was transferred to Trust. We further conclude that the termination was inadvertent within the meaning of § 1362(f). Accordingly, under § 1362(f), X will be treated as continuing to be an S corporation on and after Date 2, provided that X’s S corporation election was valid and not otherwise terminated under § 1362(d).
Except as specifically ruled above, we express or imply no opinion as to the federal income tax consequences of the facts described above under any other provision of the
Code. Specifically, we express or imply no opinion regarding X’s eligibility to be an S corporation.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it 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 X’s authorized representative.
Sincerely,
Adrienne M. Mikolashek
Chief, Branch 3
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosures (2)
Copy of Letter
Copy for 6110 purposes cc: