internal_revenue_service number release date index number -------------------------------- ------------------------------- -------------------------------------- -------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-153645-06 date date x a grat grat --------------------------------------------------------------------------------------------------- ------------------------ --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- ------------------------ ------------------------ ------------------------ trust --------------------------------------------------------------------------------------------------- ------------------------ trust --------------------------------------------------------------------------------------------------- ------------------------ ---------------------- --------------------- --------------------- -------------- d1 d2 d3 d4 plr-153645-06 dear ------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 and elected to be an s_corporation effective d1 on d2 all of the issued and outstanding shares of x were held by individuals and two trusts grat and grat grats treated as grantor retained annuity trusts the grats were treated as grantor trusts under subpart e of part i of subchapter_j of chapter of the code on d3 the grats ceased to be grantor trusts and trust and trust were established as successor trusts on d3 and thereafter trust and trust each satisfied all of the requirements of a qualified_subchapter_s_trust qsst within the meaning of sec_1361 however a the income_beneficiary of trust and trust failed to timely file an election under sec_1361 accordingly x’s s_corporation_election was terminated on d3 on d4 x’s accountant discovered the failure of trust and trust 2’s beneficiary to file the respective qsst elections and notified x that x’s s election had terminated x and x’s shareholders represent that the circumstances resulting in the termination of x’s s_corporation_election were inadvertent and were not motivated by tax_avoidance or retroactive tax planning x and each person who was or is a shareholder of x at any time since d3 agree to make such adjustment consistent with the treatment of x as an s_corporation as may be required by the secretary with respect to such period sec_1361 provides that a small_business_corporation means a domestic_corporation that is not an ineligible_corporation and that does not have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual sec_1361 provides that for purposes of sec_1361 a_trust may be a shareholder if all of it is treated under subpart e of part i of subchapter_j of chapter as owned by an individual who is a citizen or resident_of_the_united_states sec_1361 provides that for purposes of sec_1361 in the case of a_trust described in sec_1361 the deemed owner shall be treated as the shareholder sec_1361 provides that in the case of a qualified_subchapter_s_trust qsst with respect to which a beneficiary makes an election under sec_1361 such trust shall be treated as a_trust described in sec_1361 and for purposes of sec_678 the beneficiary of such trust shall be treated as the owner of that portion of the trust which consists of stock in an s_corporation with respect to which the election under sec_1361 is made sec_1362 provides that a beneficiary of a qsst or his legal_representative plr-153645-06 may elect to have sec_1361 apply sec_1361 provides that an election under sec_1362 shall be effective up to days and months before the date of the election sec_1361 provides that the term qualified_subchapter_s_trust means a_trust a the terms of which require that i during the life of the current income_beneficiary there shall be only income_beneficiary of the trust ii any corpus distributed during the life of the current income_beneficiary may be distributed only to such beneficiary iii the income_interest of the current income_beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the termination of the trust and iv upon termination of the trust during the life of the current income_beneficiary the trust shall distribute all of its assets to such beneficiary and b all of the income within the meaning of sec_643 of which is distributed or required to be distributed currently to individual who is a citizen or resident_of_the_united_states sec_1_1361-1 of the income_tax regulations provides that if s_corporation stock is transferred to a_trust the qsst election must be made within the 16-day-and-2- month period beginning on the day that the stock is transferred to the trust sec_1362 provides that except as provided in sec_1362 a small_business_corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 shall 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 a termination of an s_corporation_election under sec_1362 is effective on and after the date of cessation sec_1362 provides that if an election under sec_1362 by any corporation was terminated under sec_1362 or the secretary determines that the circumstances resulting in such termination were inadvertent no later than a reasonable period of time after discovery of the circumstances resulting in the termination steps were taken so that the corporation is a small_business_corporation and the corporation and each person who was a shareholder of the corporation at any time during the period specified under sec_1362 agrees to make the adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary for that period then notwithstanding the circumstances resulting in such termination the corporation shall be treated as an s_corporation during the period specified by the secretary based solely on the facts submitted and the representations made we hold that x's election to be an s_corporation terminated on d3 as a result of the failure of the beneficiary of trust and trust to make the election required under sec_1361 we also hold that the termination was inadvertent within the meaning of sec_1362 plr-153645-06 we further hold that pursuant to the provisions of sec_1362 x will be treated as an s_corporation from d3 and thereafter provided that the required qsst elections for trust and trust with an effective date of d3 are filed with the appropriate service_center within days from the date of this letter and x's election to be an s_corporation was otherwise valid and was not otherwise terminated under sec_1362 from d3 and thereafter trust and trust as qssts with a as the beneficiary shall be treated as owning the x stock accordingly the shareholders of x must include in income their pro_rata share of the separately_stated and nonseparately computed items of x as provided in sec_1366 make any adjustments to basis as provided in sec_1367 and take into account any distributions made by x as provided in sec_1368 if x or its shareholders fail to treat x as described above this letter_ruling will be null and void therefore trust trust and a will have to file amended returns to reflect the conclusions of this ruling except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 or whether trust or trust are qssts within the meaning of sec_1361 this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x's authorized representative sincerely j thomas hines chief branch passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes