Inadvertent Terminations

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202303002
Release Date: 1/20/2023
Index Number: 1361.00-00, 1362.00-00,
1362.04-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
---, ID No. ---
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Telephone Number:
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Refer Reply To:
CC:PSI:B01
PLR-108609-22
Date:
October 24, 2022
LEGEND
X = ---
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A = ---
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State = ---
Trust = ---
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Date 1 = ---
Date 2 = ---
Date 3 = ---
Date 4 = ---
Dear ---:
This letter responds to a letter dated April 20, 2022, and subsequent correspondence, submitted on behalf of X by X’s authorized representative, requesting relief under section 1362(f) of the Internal Revenue Code (the Code).
PLR-108609-22 2

# FACTS

The information submitted states that X was incorporated under the laws of State on Date 1 and elected to be an S corporation as of formation. On Date 2, A established Trust, a revocable trust treated as a wholly-owned grantor trust under §§ 671 and 676, and transferred shares of X to Trust as of Date 2.
On Date 3, A died and Trust ceased to be a grantor trust with respect to A’s interest, but Trust continued to qualify as an eligible S corporation shareholder under § 1361(c)(2)(A)(ii) for the 2 year period beginning on Date 3. X represents that Trust qualified to elect to be treated as a qualified subchapter S trust (QSST). However, the sole income beneficiary of Trust failed to make a timely QSST election within the meaning of § 1361(d)(2), thereby causing X’s S corporation election to terminate on Date 4.
X represents that the circumstances resulting in the failure to file the QSST election for Trust were inadvertent and not motivated by tax avoidance or retroactive tax planning. X further represents that X has filed its income tax returns consistent with having a valid S election in effect for all taxable years since X elected to be an S corporation. X and its shareholders have agreed to make any adjustments consistent with the treatment of X as an S corporation as 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 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(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 I of subchapter J of Chapter 1 of the Code) as owned by an individual who is a citizen or resident of the United States may be a shareholder of an S corporation.
Section 1361(c)(2)(A)(ii) provides that a trust may be an S corporation shareholder if it was described in § 1361(c)(2)(A)(i) immediately before the death of the deemed owner and it continues in existence after such death, but only for the 2-year period beginning on the day of the deemed owner’s death.
PLR-108609-22 3
Section 1361(d)(1) provides, in part, that in the case of a QSST with respect to which a beneficiary makes an election under § 1361(d)(2) the trust is treated as a trust described in § 1361(c)(2)(A)(i) and, for purposes of § 678(a), the beneficiary of the trust is treated as the owner of that portion of the trust which consists of stock in a S corporation with respect to which the election under § 1361(d)(2) is made.
Section 1361(d)(2)(A) provides that a beneficiary of a QSST (or his legal representative) may elect to have § 1361(d) apply.
Section 1361(d)(3) defines a QSST as 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 income 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 such 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 under § 1361(d)(2) by signing and filing, with the service center with which the S corporation files its income tax return, 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 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(f) provides, in relevant part, that if (1) an election under § 1362(a) by the corporation was terminated under § 1362(d)(2) or (3) or § 1361(b)(3)(C); (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 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 termination, such corporation shall be treated as an S corporation during the period specified by the Secretary.
PLR-108609-22 4

# CONCLUSION

Based solely on the facts submitted and representations made, we conclude that
X’s S corporation election terminated on Date 4 when Trust became an ineligible shareholder of X. We conclude that the termination 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 beginning on and after Date 4, unless X’s S corporation election is otherwise terminated under § 1362(d).
This letter ruling is subject to the condition that within 120 days from the date of this letter, the income beneficiary of Trust must file a QSST election effective Date 4 with the appropriate service center. A copy of this letter should be attached to the QSST 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 to be a QSST.
This ruling is directed only to the taxpayer that requested it. According to §
6110(k)(3), 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,
__/s/ Laura C. Fields____
Laura C. Fields
Branch Chief, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosure:
Copy for § 6110 purposes cc: