rp-98-23.pdf

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Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims for refund,
credit or abatement; determination of correct tax liability.
(Also Part I, § 1361; 1.1361-1.)
Rev. Proc. 98-23
SECTION 1. PURPOSE
This revenue procedure provides guidance on (1) the
conversion of a qualified subchapter S trust (QSST) to an
electing small business trust (ESBT), and (2) the conversion of
an ESBT to a QSST.
SECTION 2. BACKGROUND
Section 1361(a)(1) of the Internal Revenue Code defines an
AS corporation@, with respect to any taxable year, as a small
business corporation for which an S election is in effect for
that year.
Section 1361(b) defines Asmall business corporation@ as a
domestic corporation that is not an ineligible corporation and
that does not have (A) more than 75 shareholders, (B) 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) a nonresident alien as a shareholder,
and (D) more than one class of stock.
Section 1361(d)(1)(A) provides that in the case of a QSST
with respect to which a beneficiary makes an election under
§ 1361(d)(2), the trust will be treated as a trust described in

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§ 1361(c)(2)(A)(i) (relating to trusts that may be shareholders
of a small business corporation under § 1361(b)(1)).
Section 1361(d)(2)(C) provides that a QSST election under
§ 1361(d), once made, may be revoked only with the consent of the
Secretary.
Section 1361(c)(2)(A)(v) provides that an ESBT (as defined
in § 1361(e)) is a permitted S corporation shareholder.
Section 1361(e)(1)(B) provides that the term ESBT does not
include any QSST if an election under § 1361(d)(2) applies to any
corporation the stock of which is held by the trust.
Section 1361(e)(3) provides that an ESBT election under
§ 1361(e) applies to the taxable year of the trust for which made
and all subsequent taxable years of the trust unless revoked with
the consent of the Secretary.
Section 1377(a) provides rules for determining a
shareholder’s pro rata share of any item for any taxable year.
SECTION 3. SCOPE
Section 4 of this revenue procedure provides guidance on how
to convert a QSST to an ESBT. Section 5 of this revenue
procedure provides guidance on how to convert an ESBT to a QSST.
A trust that wishes to convert within 36 months of a previous
conversion must submit an application for consent to revoke the
QSST or ESBT election to the Internal Revenue Service in the form
of a letter ruling request under Rev. Proc. 98-1, 1998-1 I.R.B. 7
(or its successor). The application must be signed by the
current income beneficiary and the trustee.

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This revenue procedure does not provide guidance on whether
a trust qualifies as a QSST or an ESBT. In particular, the
Internal Revenue Service is currently studying whether a trust
qualifies as an ESBT if any portion of the trust is treated as
owned by the grantor or another person under the provisions of
subpart E (section 671 and following), part I, subchapter J,
chapter 1 of the Internal Revenue Code.
SECTION 4. CONVERSION OF A QSST TO AN ESBT
.01 Prerequisites for Conversion from QSST to ESBT. A trust
is eligible to convert from a QSST to an ESBT if it meets the
following requirements:
(1) The trust meets all of the requirements to be an ESBT
under § 1361(e), except for the requirement under § 1361(e)(1)(B)
that the trust not have a QSST election in place under
§ 1361(d)(2).
(2) The trustee and the current income beneficiary of the
trust make the ESBT election pursuant to section 4.02 of this
revenue procedure with respect to the stock of each S corporation
held by the trust.
(3) The trust has not converted from an ESBT to a QSST
within the 36 month period preceding the effective date of the
new ESBT election.
(4) Except as provided in section 6 of this revenue
procedure, the date on which the ESBT election is to be effective
can not be more than 15 days and 2 months prior to the date on
which the election is filed and can not be more than 12 months

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after the date on which the election is filed. If an election
specifies an effective date more than 15 days and 2 months prior
to the date on which the election is filed, it will be effective
15 days and 2 months prior to the date on which it is filed. If
an election specifies an effective date more than 12 months after
the date on which the election is filed, it will be effective 12
months after the date it was filed.
.02 Procedural Requirements for Conversion from QSST to ESBT.
The current income beneficiary and the trustee of the trust
must sign an ESBT election and file it with the service center
where the S corporation files its income tax return. This ESBT
election must state at the top of the document "ATTENTION ENTITY
CONTROL - CONVERSION OF A QSST TO AN ESBT PURSUANT TO REV. PROC.
98-23" and include all information otherwise required for an ESBT
election (see Notice 97-12, 1997-3 I.R.B. 11). A separate
election must be made with respect to the stock of each S
corporation held by the trust.
.03 Conversion from QSST to ESBT.
Pursuant to § 1361(d)(2)(C), the consent of the Commissioner
to revoke a QSST election as of the effective date of the ESBT
election is hereby granted to any QSST that satisfies the
requirements of sections 4.01 and 4.02 of this revenue procedure.
For purposes of § 1377(a), the QSST will be treated as
terminating its interest in the S corporation and the new ESBT
will be treated as a new shareholder of the S corporation. The
last day the QSST will be a shareholder is the day before the

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effective date of the ESBT election, and the new ESBT will be a
shareholder beginning on the effective date of the ESBT election.
SECTION 5. CONVERSION OF AN ESBT TO A QSST
.01 Prerequisites for Conversion from ESBT to QSST. A trust
is eligible to convert from an ESBT to a QSST if it meets the
following requirements:
(1) The trust meets all of the requirements to be a QSST
under § 1361(d).
(2) The trustee and current income beneficiary of the trust
make the QSST election pursuant to section 5.02 of this revenue
procedure with respect to the stock of each S corporation held by
the trust.
(3) The trust has not converted from a QSST to an ESBT
within the 36 month period preceding the effective date of the
new QSST election.
(4) Except as provided in section 6 of this revenue
procedure, the date on which the QSST election is to be effective
can not be more than 15 days and 2 months prior to the date on
which the election is filed and can not be more than 12 months
after the date on which the election is filed. If an election
specifies an effective date more than 15 days and 2 months prior
to the date on which the election is filed, it will be effective
15 days and 2 months prior to the date on which it is filed. If
an election specifies an effective date more than 12 months after
the date on which the election is filed, it will be effective 12
months after the date it was filed.

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.02 Procedural Requirements for Conversion from ESBT to QSST.
The current income beneficiary and the trustee of the trust
must sign a QSST election and file it with the service center
where the S corporation files its income tax return. This QSST
election must state at the top of the document "ATTENTION ENTITY
CONTROL - CONVERSION OF AN ESBT TO A QSST PURSUANT TO REV. PROC.
98-23" and include all information otherwise required for a QSST
election (see § 1.1361-1(j)(6) of the Income Tax Regulations). A
separate election must be made with respect to the stock of each
S corporation held by the trust.
.03 Conversion from ESBT to QSST.
Pursuant to § 1361(e)(3), the consent of the Commissioner to
revoke an ESBT election as of the effective date of the QSST
election is hereby granted to any ESBT that satisfies the
requirements of sections 5.01 and 5.02 of this revenue procedure.
For purposes of § 1377(a), the ESBT will be treated as
terminating its interest in the S corporation and the new QSST
will be treated as a new shareholder of the S corporation. The
last day the ESBT will be a shareholder is the day before the
effective date of the QSST election, and the new QSST will be a
shareholder beginning on the effective date of the QSST election.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective for taxable years
beginning after December 31, 1996. An election can be made
effective as of any date on or after January 1, 1997, and before

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March 9, 1998, if it is filed not more than 15 days and 2 months
after March 9, 1998.
PAPERWORK REDUCTION ACT
The collection of information contained in this revenue
procedure has been reviewed and approved by the Office of
Management and Budget in accordance with the Paperwork Reduction
Act (44 U.S.C. 3507) under control number 1545-1591.
An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless the
collection of information displays a valid control number.
The collections of information in this revenue procedure are
in sections 4.02 and 5.02. This information is required by the
Internal Revenue Service to assure compliance with the new
provisions of the Small Business Job Protection Act of 1996. The
likely respondents are business or other for-profit institutions.
The estimated total annual reporting burden is 2500 hours.
The estimated average annual burden per respondent is one
hour. The estimated number of respondents is 2500.
The estimated frequency of responses is once.
Books or records relating to a collection of information
must be retained as long as their contents may become material in
the administration of any internal revenue law. Generally tax
returns and tax return information are confidential, as required
by 26 U.S.C. 6103.

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DRAFTING INFORMATION
The principal author of this revenue procedure is Steven R.
Schneider of the Office of Assistant Chief Counsel (Passthroughs
and Special Industries). For further information regarding this
revenue procedure contact Steven R. Schneider at (202) 622-3060
(not a toll-free call).