Inadvertent Terminations

Internal Revenue Service
Number: 202418008
Release Date: 5/3/2024
Index Number: 1361.00-00, 1361.03-00,
1361.03-02, 1362.00-00,
1362.02-00, 1362.04-00
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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:01
PLR-115991-23
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Date:
February 07, 2024
LEGEND
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X =
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A =
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Trust =
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State = ---
Date 1 = ---
Date 2 = ---
Date 3 = ---
Date 4 = ---
Date 5 = ---
Date 6 = ---
PLR-115991-23 2
Dear ---:
This letter responds to a letter dated July 18, 2023, and subsequent correspondence, submitted on behalf of X by its authorized representative, requesting a ruling under § 1362(f) of the Internal Revenue Code (Code).

# FACTS

The information submitted states that X was incorporated on Date 1 under the laws of
State. X elected to be treated as an S corporation effective Date 2. A, an individual, owned shares of X stock. On Date 3, A died. After A’s death, on Date 4, A’s shares in X were transferred to Trust. Under § 1361(c)(2)(A)(ii), Trust qualified as an eligible S corporation shareholder for the two-year period beginning on the day the shares of X stock were transferred to it, ending Date 5. Trust remained a shareholder until Date 6.
X represents that beginning on Date 4, Trust met the requirements of a Qualified
Subchapter S Trust (QSST) within the meaning of § 1361(d)(3). However, the beneficiary of Trust inadvertently failed to make a timely election for Trust to be treated as a QSST under § 1361(d)(2), thus causing X’s S corporation election to terminate on Date 5.
X represents that there was no tax avoidance or retroactive tax planning involved in the failure of Trust to file a QSST 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 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.
PLR-115991-23 3
Section 1361(c)(2)(A)(iii) provides that, for purposes of § 1361(b)(1)(B), a trust with respect to stock transferred to it pursuant to the terms of a will may be a shareholder, but only for the 2-year period beginning on the day on which such stock is transferred to it.
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) 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(d)(1) provides, in pertinent 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 an S corporation with respect to which the election under § 1361(d)(2) is made.
Section 1361(d)(3) provides that the term “qualified subchapter S trust” means a trust

(A) the terms of which require that (i) during the life of the current income beneficiary, there shall be only 1 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 section 643(b)) of which is distributed (or required to be distributed) currently to 1 individual who is a citizen or resident of the United States. A substantially separate and independent share of a trust within the meaning of § 663(c) shall be treated as a separate trust for purposes of § 1361(d)(3) and § 1361(c).
Section 1.1361-1(j)(7)(i) of the Income Tax Regulations provides that the income beneficiary who makes the QSST election and is treated (for purposes of § 678(a)) as the owner of that portion of the trust that consists of S corporation stock is treated as the shareholder for purposes of §§ 1361(b)(1), 1366, 1367, and 1368.
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 not effective for the taxable year for which made (determined without PLR-115991-23 4 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, because no QSST election was filed for Trust. We also conclude that the termination of X’s S corporation election on Date 5 was inadvertent within the meaning of § 1362(f). Accordingly, X will be treated as an S corporation effective Date 5 and thereafter, provided that X’s S corporation election was valid and not otherwise terminated under § 1362(d).
This ruling is contingent upon the beneficiary of Trust filing an appropriately completed
QSST election for Trust effective Date 5. The election must be made, and any amended returns must be timely filed, with the appropriate service center within 120 days following the date of this letter, and a copy of this letter should be attached to the returns. If these conditions are not met, this ruling is null and void.
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 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.
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Pursuant to the power of attorney on file with this office, we are sending a copy of this letter to X’s authorized representative.
Enclosure
Copy for § 6110 purposes cc: ---
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Sincerely,
By:
Christiaan T. Cleary
Assistant to the Branch Chief,
Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)