IRS written determination 201613004

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: 201613004
Release Date: 3/25/2016
Index Number: 1362.04-00
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LEGEND
X=-----------------------------------
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Y=------------------------------------
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A= ---------------------------
Date 1= -------------------
State= ------------
Date 2= --------------------------
Date 3= ----------------------
Date 4=------------------
Date 5=------------------
Date 6=----------------------
Trust= ------------------------------------
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Third Party Communication:
None
Person To Contact:
---------------------------, ID No. ---------------
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Telephone Number:
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Refer Reply To:
CC:PSI:B03
PLR-119516-15
Date:
November 23, 2015

Dear --------------:
This responds to a letter dated June 5, 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
According to the information submitted and representations made, X was
incorporated on Date 1and Y was incorporated on Date 2, both under the laws of State.
Effective Date 3, X elected to be taxed as an S corporation and to treat Y, its wholly
owned subsidiary, as a qualified subchapter S subsidiary (QSub) under § 1361(b)(3) of
the Code. Prior to Date 4, Trustwas a grantor trust wholly owned by A and was an
eligible shareholder of X. On Date 4, A died and Trustceased being a grantor trust.
Trustqualified under § 1361(c)(2)(A)(ii) as an eligible shareholder for two years from A’s
date of death. However, a timely election to treat Trust as an electing small business
trust (“ESBT”) after this period was not made. Trustbecame an ineligible shareholder
of X, causing X's S corporation election and Y’s QSub election to terminate, effective
Date 5.
On Date 6, X redeemed all Trust’s shares of stock in X.
X represents that since Date 3, it has filed its federal income tax returns
consistent with being an S corporation and has reported Y’s operations consistent with
its QSub election. X represents that its S corporation election termination was
inadvertent and was not motivated by tax avoidance or retroactive tax planning. Trust
and X represent that Trustwould have qualified as an ESBT since Date 5, and Trust
has filed its returns consistent with being an ESBT. Further, X represents that X and its
shareholders will 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.

PLR-119516-15
3
Section 1361(b)(3)(A) provides that a QSub shall not be treated as a separate
corporation, and all assets, liabilities, and items of income, deduction, and credit of a
QSub shall be treated as assets, liabilities, and such items (as the case may be) of the
S corporation.
Section 1361(b)(3)(B) defines a “qualified subchapter S subsidiary” as a
domestic corporation which is not an ineligible corporation, if 100 percent of the stock of
the corporation is owned by the S corporation, and the S corporation elects to treat the
corporation as a qualified subchapter S subsidiary.
Section 1361(c)(2)(A) provides,in relevant part, that, for purposes of
§ 1361(b)(1)(B), the following trusts may be shareholders of an S corporation: (i) 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; (ii) 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; and (iii) an ESBT.
Section 1361(e)(1)(A) 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)(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 meetsthe requirements of § 1.1361-1(m)(2)(ii).
Section 1.1361-1(m)(2)(iii) provides that the election must be filed within the time
requirements prescribed in § 1.1361-1(j)(6)(iii) for filing a qualified subchapter S trust
election (generally within the 16-day-and-2-month period beginning on the day that the
stock is transferred to the trust).
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.

PLR-119516-15
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Section 1362(f) provides, in relevant part, that if (1) an election under § 1362(a)
or § 1361(b)(3)(B)(ii) 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 corporationshall
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 and Y’s QSub election inadvertently terminated within the
meaning of § 1362(f) on Date 5due to the trustee’s failure to make an ESBT election for
Trust. Pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S
corporation and Y will be treated as continuing to be a QSub from Date 5and thereafter,
provided X's S corporation election and Y’s QSub election were otherwise valid and
have not otherwise terminated under § 1362(d).
This ruling is contingent upon, within 120 days from the date of this letter, the
trustee filing withthe appropriate service center an election to treat Trustas an ESBT
effective Date 5. 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, Y’s ability to be a QSub, or Trust’s eligibility to be an
ESBT.
This ruling is directed only to the taxpayer that requested it. According to
§ 6110(k)(3), this ruling may not be used or cited as precedent.

PLR-119516-15
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Pursuant to the power of attorney on file with this office, we are sending a copy of
this letter to your authorizedrepresentatives.
Sincerely,

Holly Porter
Branch Chief, Branch 3
Associate Chief Counsel
(Passthroughs and Special Industries)
Enclosures (2)
Copy of this letter
Copy for § 6110 purposes