IRS written determination 201604005

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: 201604005
Release Date: 1/22/2016
Index Number: 1362.04-00, 1362.00-00
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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:B03
PLR-113280-15
Date:
August 31, 2015
X= -----------------------------------------
--------------------------
A= ----------------------------
Date 1= --------------------------
State= --------------------------
Date 2= -----------------------
Date 3= -----------------------
Years= -----------------------
Trust= ------------------
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Dear ----------:
This responds to a letter dated April 14, 2015, and supplemental information, submitted
on behalf of X by X’s authorized representative, requesting relief under section 1362(f)
of the Internal Revenue Code (the Code).
FACTS

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2
According to the information submitted and representations within, X was incorporated
on Date 1, under the laws of State. Effective Date 1, X elected to be taxed as an S
corporation. Prior to Date 2, Trustwas a grantor trust wholly owned by A and as such
an eligible shareholder of X. On Date 2, A died and Trustceased being a grantor trust.
A timely election to treat Trustas an electing smallbusiness trust (“ESBT”) was not
made, thus Trustbecame an ineligible shareholder of X, causing X’s S corporation
election to terminate effective Date 3.
X represents that Trusthas at all times met the requirements of an ESBT within the
meaning of § 1361(e). X further represents that since Date 2, it has filed its federal
income tax returns consistent with being an S corporation. X represents that its S
corporation election termination was inadvertent and was not motivated by tax
avoidance or retroactive tax planning. Further, X represents that 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) of the Code 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) defines a “small business corporation” as 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 1
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) as owned by an
individual who is a citizen or resident of the United States may be an S corporation
shareholder.
Section 1361 (c)(2)(A)(ii) provides that, for purposes of § 1361(b)(1)(B), a trust that was
described in § 1361(c)(2)(A)(i) immediately before the death of the deemed owner and
which continues in existence after such death, but only for the 2-year period beginning
on the day of the deemed owner’s death.
Section 1361(c)(2)(A)(v) provides that, for purposes of § 1361(b)(1)(B), an electing
small business trust (ESBT) may be an S corporation shareholder.

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Section 1361(e) provides that an ESBT 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), (3), (4) or (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)(1)(B) provides that the term ESBT shall not include (i) any qualified
subchapter S trust (as defined in § 1361(d)(3)) if an election under § 1361(d)(2) applies
to any corporation the stock of which is held by such trust, (ii) any trust exempt from tax
under subtitle A, and (iii) any charitable remainder annuity trust or charitable remainder
unitrust (as defined in § 664(d)).
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
all subsequent taxable years of such trust unless revoked with the consent of the
Secretary.
Section 1.1361-1(m)(2)(i) provides that the trustee of an ESBT must make the ESBT
election by signing and filing, with the service center where the S corporation files its
income tax return, a statement that meets the requirements of § 1.1361-1(m)(2)(ii).
Section1.1361-1(m)(2)(iii) provides that the trustee of an ESBT must file the ESBT
election within the time requirements prescribed in § 1.1361-1(j)(6)(iii) for filing a QSST
election (generally within the 16-day-and-2-month period beginning on the day that the
stock is transferred to the trust).
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 such termination were inadvertent; (3) no later than a
reasonable period of time after discovery of the circumstances resulting in such
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 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 termination, such corporation shall be treated as an S
corporation during the period specified by the Secretary.
Section 1.1362-4(b) provides that for purposes of § 1.1362-4(a), the determination of
whether a termination or invalid election was inadvertent is made by the Commissioner.
The corporation has the burden of establishing that under the relevant facts and
circumstances the Commissioner should determine that the termination or invalid

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election was inadvertent. The fact that the terminating event or invalidity of the election
was not reasonably within the control of the corporation, and in the case of a
termination, was not part of a plan to terminate the election, or the fact that the
terminating event or circumstance took place without the knowledge of the corporation,
notwithstanding its due diligence to safeguard itself against such event or circumstance,
tends to establish that the termination or invalidity of the election was inadvertent.
Section 1.1362-4(d) provides that the Commissioner may require any adjustments that
are appropriate. In general, the adjustments required should be consistent with the
treatment of the corporation as an S corporation or QSub during the period specified by
the Commissioner. In the case of stock held by an ineligible shareholder that causes an
inadvertent termination or invalid election for an S corporation under section 1362(f), the
Commissioner may require the ineligible shareholder to be treated as a shareholder of
the S corporation during the period the ineligible shareholder actually held stock in the
corporation. Moreover, the Commissioner may require protectiveadjustments that
prevent the loss of any revenue due to the holding of stock by an ineligible shareholder
(for example, a nonresident alien).
CONCLUSION
Based solely on the facts submitted and the representations made, we conclude that
X’s S corporation election inadvertently terminated within the meaning of § 1362(f) on
Date 3when Trustbecame an ineligible shareholder. Pursuant to the provisions of §
1362(f), X will be treated as an S corporation from Date 3and thereafter, provided X’s S
corporation election is not otherwise terminated under § 1362(d).
This letter is contingent upon, within 120 days from the date of this letter, the trustee
filing with the appropriate service center an election to treat Trustas an ESBT effective
Date 3. Furthermore, Trustmust file amended returns and make any adjustments that
are necessary to properly reflect the treatment of Trustas an ESBT for Yearstaxable
years. A copy of this letter should be attached to the ESBT election.
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.
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.

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Pursuant to the power of attorney on file with this office, we are sending acopy of this
letter to your authorized representative.
Sincerely,

James A. Quinn
Senior Counsel, Branch 3
Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosures (2)
Copy of this letter
Copy for § 6110 purposes