SECTION 2. BACKGROUND

Section 1361(a)(1) of the Internal Revenue Code defines an “S corporation,” with respect to any taxable year, as a small business corporation for which an S election is in effect for that year.

Section 1361(b) defines “small business corporation” as a domestic corporation that is not an ineligible corporation and that does not have (A) more than 75 shareholders, (B) 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) a nonresident alien as a shareholder, and (D) more than one class of stock.

Section 1361(d)(1)(A) provides that in the case of a QSST with respect to which a beneficiary makes an election under § 1361(d)(2), the trust will be treated as a trust described in § 1361(c)(2)(A)(i) (relating to trusts that may be shareholders of a small business corporation under § 1361(b)(1)).

Section 1361(d)(2)(C) provides that a QSST election under § 1361(d), once made, may be revoked only with the consent of the Secretary.

Section 1361(c)(2)(A)(v) provides that an ESBT (as defined in § 1361(e)) is a permitted S corporation shareholder.

Section 1361(e)(1)(B) provides that the term ESBT does not include any QSST if an election under § 1361(d)(2) applies to any corporation the stock of which is held by the trust.

Section 1361(e)(3) provides that an ESBT election under § 1361(e) applies to the taxable year of the trust for which made and all subsequent taxable years of

the trust unless revoked with the consent of the Secretary.

Section 1377(a) provides rules for determining a shareholder’s pro rata share of any item for any taxable year.