Summary

In PLR 201208023, the Service granted inadvertent termination relief to an S corporation where a trust beneficiary failed to make a timely election to treat the trust as a qualified subchapter S trust (or QSST).

Extended Summary

The decedent's revocable trust held the shares. During the decedent's lifetime, the revocable trust was an eligible S corporation shareholder, because the trust was treated for income tax purposes as entirely owned by the decedent. After the decedent's death, the trust continued to qualify under a Code provision allowing a trust to hold S corporation stock during a two-year period of estate administration.

Within that two-year period, the shares were distributed to a trust for the sole benefit of one individual. The trust would have qualified as a QSST, but the beneficiary did not make a timely election.

Although no reason was given for the omission, the Service accepted that the termination of S corporation status was inadvertent, and allowed the late election.

CPC Commentary

There are reasons why a trust beneficiary might not want to elect QSST status. The election causes that portion of the trust comprised of S corporation stock to be treated as a grantor trust for income tax purposes, and treats the beneficiary as the owner of the stock for purposes of calculating passive activity loss limitations.

It might be helpful in rulings like this, which are quite common, if the Service would briefly mention the factual basis for determining the beneficiary simply neglected to make a timely election.

Nearly every week, the Service releases a number of PLRs dealing with missed QSST or ESBT elections. We do not cover most of these, as they involve lifetime transfers. However, we do briefly note those rulings that arise in the context of transfers at death.

Relevant Documents

	201208023: Inadvertent Terminations	2/24/12
	Section 1362: Election; revocation; termination	3/24/10
	Section 1361: S corporation defined	3/24/10