IRS written determination 201615002

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: 201615002
Release Date: 4/8/2016
Index Number: 1362.04-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:B03
PLR-123579-15
Date:
January 05, 2016
Legend
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Trust=--------------------------------------------------------------------------
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PLR-123579-15
2
Dear -----------------:
This letter responds to a letter dated July 9, 2015, 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 organized under the laws of State
on D1and elected to be an S corporation effective D2. As of D3, Trust, a qualified
subchapter S trust (QSST), owned shares in X. On D4, the Income Beneficiaryof Trust
died.
X represents that Trustwas eligible to be an electing small business trust (ESBT)
within the meaning of §1361(e) on D4and thereafter, but the trustee did not timely file
an ESBT election. Therefore, on D5, two years after D4, X’s S corporation election
terminated. The trustee of Trusthas since filed an ESBT election effective D4in
connection with another ruling and has treated Trustas an ESBT effective D4and
thereafter.
X represents that the termination was not motivated by tax avoidance or
retroactive tax planning. X furtherrepresents that it has filed consistently as an S
corporation since D2. X and its shareholders 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.

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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 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(c)(2)(A)(ii) provides that a trust that was described in
§ 1361(c)(2)(A)(i) immediately before the death of the deemed owner and that continues
in existence after the owner’s death may be a shareholder, but only for the two-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 ESBT
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(e) defines an ESBT. Section 1361(e)(1)(A) provides that, except as
provided in § 1361(e)(1)(B), 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)(3) provides that an election under
§ 1361(e) shall be made by the trustee.
Section 1.1361-1(m)(2)(i) of the Income Tax Regulations 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).
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
laterthan a reasonable period of time after discovery of the circumstances resulting in

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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,
notwithstandingthe 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 D5when 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 D5and thereafter, provided X’s S corporation election was otherwise
valid and has not otherwise terminated under §1362(d) for reasons not addressed in
this letter.
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.
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,
Mary Beth Carchia
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