Inadvertent Terminations

Internal Revenue Service
Number: 202317015
Release Date: 4/28/2023
Index Number: 1361.03-00, 1361.03-01,
1361.03-02, 1362.00-00,
1362.01-00, 1362.02-00,
1362.02-02, 1362.04-00
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Legend
Department of the Treasury
Washington, DC 20224
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-117053-22
Date:
January 25, 2023
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X =
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A = ---
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Trust =
--- a = ---
Date 1 = ---
Date 2 = ---
Date 3 = ---
Date 4 = ---
Date 5 = ---
State = ---
Dear ---:
PLR-117053-22 2
This letter responds to a letter dated September 1, 2022, and subsequent correspondence, submitted on behalf of X, by X’s authorized representative, requesting relief under § 1362(f) of the Internal Revenue Code.

# FACTS

According to the information submitted, X was incorporated under the laws of State on
Date 1 and elected to be treated as an S corporation effective Date 1. Trust was formed on Date 2 with A as grantor and settlor. Trust was treated as a grantor trust until Date 3, when A died. At the time of A’s death on Date 3, A held a% of stock in X.
An election was made under § 645 to treat Trust as part of A’s estate on Date 3. A’s shares of X stock were transferred to Trust on Date 4. However, the beneficiary of Trust failed to timely make a Qualified Subchapter S Trust (QSST) election. The § 645 election terminated on Date 4, which is before Date 5, the last day of the 2-year period beginning on the day of A’s death.
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. Additionally, X represents that X and its shareholders have filed their federal income tax returns consistent with having a valid S corporation election in effect for X. 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 with respect to the period specified by § 1362(f).

# 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) 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 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.
Section 1361(c)(2)(A)(ii) provides that, for purposes of § 1361(b)(1)(B), a trust which was described in clause § 1361(c)(2)(A)(i) immediately before the death of the deemed PLR-117053-22 3 owner and which continues in existence after such death may be a shareholder, but only for the 2-year period beginning on the day of the deemed owner's death.
Section 1361(d)(1) provides 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 such trust shall be treated as the owner 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 1361(d)(2)(A) provides that a beneficiary of a QSST may elect to have §
1361(d) apply. Section 1.1361-1(j)(6)(ii) provides that the current income beneficiary of a QSST must make the election under § 1361(d)(2) by signing and filing with the service center with which the corporation files its income tax returns the applicable form or a statement including the information listed in § 1.1361-1(j)(6)(ii).
Section 1362(d)(2) provides that (A) in general, 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, and (B) any termination under § 1362(d)(2) shall be 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 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 or was terminated under § 1362(d)(2), (2) the Secretary determines that the circumstances resulting in such ineffectiveness or 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 election was made or the termination occurred is a small business corporation or to acquire the required shareholder consents, and (4) the corporation for which the election was made or 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 ineffectiveness or 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 representations made, we conclude that X’s S corporation election terminated on Date 5. We further conclude that the termination was inadvertent within the meaning of § 1362(f). Accordingly, X will be treated as continuing to be an S corporation from Date 5, and thereafter, provided that its S corporation election was otherwise valid and was not otherwise terminated under § 1362(d).
PLR-117053-22 4
This ruling is contingent upon the beneficiaries of Trust filing a QSST election, with an effective date of Date 5, with the appropriate service center within 120 days of the date of this ruling. A copy of this letter should be attached to the QSST election. If the conditions are not met, this ruling is null and void.
Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, no opinion is expressed or implied concerning the eligibility of X to be an S corporation.
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.
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,
Joy Spies, Senior Technician Reviewer
Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosure
Copy for § 6110 purposes cc: