IRS written determination 201615003

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201615003
Release Date: 4/8/2016
Index Number: 1362.04-00
----------------------------------
-------------------------------------------
---------------------
----------------------------------
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
--------------------------, ID No. ----------------
-----------------
Telephone Number:
---------------------
Refer Reply To:
CC:PSI:B03
PLR-123622-15
Date:
December 01, 2015
Legend
X=--------------------------------------------------------------------------
State=----------
D1=------------------
D2=-------------------------
D3=---------------------
D4=---------------------
D5=--------------------------
D6=-----------------------
Shareholder=----------------------------------------------------------------------------
Trust1=--------------------------------------------------
Trust2=----------------------------------------------------------------------------
----------------------------------------------------------------------------
--
Year1=-------
Year2=-------
n= ------------

PLR-123622-15
2
Dear -------------:
This letter responds to a letter dated June 26, 2015, and subsequent information,
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 organized under the laws of State
on D1and elected to be an S corporation effective D2. Shareholdertransferred all of
the shares in X to Trust1on D3. X represents that Trust1was a permitted S corporation
shareholder through D5. On D4, a date prior to D5, Trust1transferred the shares in X
to Trust2for the benefit of Income Beneficiary, who is the same person as Shareholder.
X represents that Trust2was eligible on D4and thereafter to be a qualified
subchapter S trust (QSST) within the meaning of §1361(d), but the Income Beneficiary
did not timely file a QSST election. Furthermore, from Year1through Year2, the trustee
failed to distribute all of the trust’s income to the Income Beneficiaryin accordance with
the terms of Trust2. Therefore, on D4, X’s S corporation election terminated.
X represents that the termination was not motivated by tax avoidance or
retroactive tax planning, and that Trust2will distribute all previously undistributed trust
income to Income Beneficiary. X further represents that it has filed consistently as an S
corporation since D2. X and its shareholder have agreed to make any adjustments that
the Commissioner may require, consistent with the treatment of X as an S corporation.
LAW AND ANALYSIS
Section 1362(a) provides that, except as provided in § 1362(g), a small business
corporation may elect, in accordance with the provisions of § 1362, to be an S
corporation.
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

PLR-123622-15
3
of which is treated (under subpart E of part 1 of subchapter J of Chapter 1) as owned by
an individual who is a citizen or resident of the United States may be a shareholder.
Section 1361(d)(1) provides that a QSST whose beneficiary makes an election
under §1361(d)(2) will be treated as a trust described in § 1361(c)(2)(A)(i), and the
beneficiary of such trust shall be treated as the owner (for purposes of § 678(a)) 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 (or his legal
representative) may elect to have § 1361(d) apply. Section 1361(d)(2)(D) provides that
an election under § 1361(d)(2) shall be effective up to 15 days and 2 months before the
date of the election.
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 where the 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) will 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(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), (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 (A) so that the corporation is a small business
corporation, and (4) the corporation 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 the representations made, we conclude
that X’s S corporation election terminated on D4when X had an ineligible shareholder.
We also conclude that the circumstances resulting in the termination were inadvertent
within the meaning of §1362(f). Accordingly, under § 1362(f), X will be treated as an S
corporation from D4and thereafter, provided X’s S corporation election was otherwise

PLR-123622-15
4
valid and has not otherwise terminated under §1362(d) for reasons not addressed in
this letter.
This ruling is conditioned on the estate of Income Beneficiaryfiling, on behalf of
Income Beneficiary, a QSST election for Trust2, effective D4, with the appropriate
service center within 120 days of the date of this letter. A copy of this letter should be
attached to the QSST election.
In addition, this ruling is conditioned on Trust2filing any amended returns and
making adjustments that are necessary to properly reflect the treatment of Trust2as an
QSST, including the distribution ofall of Trust2’s previously undistributed income to
Income Beneficiary, consistent with X’s representation.
Furthermore, as an adjustment under § 1362(f), a payment of $n and a copy of
this letter ruling must be sent to the following address: Internal Revenue Service,
Cincinnati Service Center, 201 West Rivercenter Blvd., Covington, KY 41011, Stop 31, -
-----------------, Manual Deposit. The payment and a copy of this letter must be sent no
later than D6.
If all of the above conditions are not met, then this ruling is null and void.
Furthermore, if these conditions are not met, X must send a notification that its S
corporation election has terminated to the service center with which X’s S corporation
election was filed.
Except as specifically ruled above, we express or imply no opinion concerning
the federal tax consequences of the facts described above under any other provisions
of the Code. Specifically, we express no opinion regarding X’s eligibility to be an S
corporation.
This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)
of the Code provides that it may not be used or cited as precedent.

PLR-123622-15
5
In accordance with a power of attorney on file with this office, we are sending a
copy of this letter to X’s authorized representative.
Sincerely,
Richard T. Probst
Senior Technician Reviewer, Branch 3
Office of the Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosures (2):
Copy of this letter
Copy for §6110 purposes