Inadvertent Terminations

Internal Revenue Service
Number: 202319004
Release Date: 5/12/2023
Index Number: 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. ---
Telephone Number:
---
Refer Reply To:
CC:PSI:B03
PLR-115499-22
Date:
February 01, 2023
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X =
---
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Trust =
---

Date 3 = ---
N = ---
Dear ---:
This letter responds to a letter dated August 1, 2022, and subsequent correspondence, submitted on behalf of X by its authorized representatives requesting a ruling under § 1362(f) of the Internal Revenue Code (Code).
PLR-115499-22 2

# FACTS

The information submitted states that X was incorporated on Date 1 under the laws of State. X elected to be an S corporation effective Date 2. On Date 3, X stock was transferred to Trust. As of Date 3, Trust was eligible to elect to be treated as an Electing Small Business Trust (ESBT) within the meaning of § 1361(e)(3). However, the trustees of Trust did not make a timely election for Trust to be treated as an ESBT under § 1361(e)(3), thus causing X’s S corporation election to terminate effective Date 3.
X represents that there was no tax avoidance or retroactive tax planning involved in the failure of Trust to file an ESBT election and the resulting termination of X’s S corporation election. X and its shareholders agree to make any adjustments required as a condition of obtaining relief under the inadvertent termination rule as provided under § 1362(f) of the Code that 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 the year.
Section 1361(b)(1)(B) defines a “small business corporation”, in part, as a domestic corporation which is not an ineligible corporation and which does not 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.
Section 1361(c)(2)(A)(v) provides that for purposes of § 1361(b)(1)(B), an ESBT is a permissible shareholder.
Section 1361(e)(1)(A) provides that, for purposes of § 1361, except as provided in § 1361(e)(1)(B), the term “electing small business trust” 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)-(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 subsequent taxable years of such trust unless revoked with the consent of the Secretary.
Section 1.1361-1(m)(2)(i) provides, in part, that the trustee of an ESBT must make the ESBT election by signing and filing, with the service center where the S PLR-115499-22 3 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 ESBT election must be filed within the time requirements prescribed in § 1.1361-1(j)(6)(iii) for filing a QSST election.
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(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 § 1362(d)(2) or (3) or § 1361(b)(3)(C), (2) the Secretary determines that the circumstances resulting in the termination were inadvertent, (3) no later than a reasonable period of time after discovery of the circumstances resulting in the 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 of the corporation at any time during the period specified pursuant to § 1362(f), agrees to make such adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to such period, then, notwithstanding the circumstances resulting in the termination, the corporation will 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 3, because no ESBT election was filed for
Trust. We further conclude that the termination of X’s S corporation election on Date 3, was inadvertent within the meaning of § 1362(f). Accordingly, X will be treated as an S corporation effective Date 3, and thereafter, provided that X’s S corporation election was otherwise valid and was not otherwise terminated under § 1362(d).
This letter ruling, is subject to the following must be filed with the appropriate service center within 120 days from the date of this letter the trustee of Trust must file an ESBT effective Date 3. A copy of this letter must be attached to the ESBT election.
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 within 45 days from the date of this letter: Internal Revenue Service, Kansas City Submission Processing Campus, 333 W.
Pershing Road, Kansas City, MO 64108, Stop 7777, Attn: Manual Deposit.
PLR-115499-22 4
If the above conditions are not met, then this ruling is null and void. Furthermore, if these conditions are not met, X must notify the service center where X’s S corporation election is filed that its S corporation election has terminated effective Date 3.
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.
The ruling contained in this letter is based on 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.
This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) provides that this ruling may not be used or cited as precedent.
Pursuant to a power of attorney on file with this office, we are sending a copy of this letter to your authorized representative.
Sincerely,
Richard T. Probst
Senior Technician Reviewer, Branch 3
Office of Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosure:
Copy for § 6110 purposes cc: