SECTION 3. SCOPE

.01 In General. This revenue procedure extends the special procedure for late S corporation elections described in Rev. Proc. 97–40 from 6 months to 12 months (but in no event later than the unextended due date of the tax return for the first year the corporation intended to be an S corporation), provides similar relief for certain QSub elections, and extends the application of Rev. Proc. 94–23 to ESBT elections.

.02 Late S Corporation Elections. With respect to late S corporation election s, this revenue procedure applies only to a corporation (1) that has not filed a timely S corporation election under § 1362(a)(1), (2) for which an S corporation election is filed within 12 months of the original due date for the election, and (3) for which the due date for the tax return (excluding ex

effective for the taxable year for which it was made by reason of a failure to meet the requirements of § 1361(b), or where the corporation’s S election terminates under § 1362(d)(2) or (3). A corporation is eligible for relief under this provision if (1) the Secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent, (2) no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination, steps were taken so that the S corporation is a small business corporation, and (3) 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 any adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to the period. If a corporation is eligible for relief under this provision, then, notwithstanding the circumstances resulting in the ineffectiveness or termination, the corporation will be treated as an S corporation during the period specified by the Secretary.

Section 1.1362–4 of the Income Tax Regulations sets forth additional guidance regarding inadvertent termination relief. Section 1.1362–4(b) provides that the corporation has the burden of establishing that under the relevant facts and circumstances the Commissioner should determine that the termination was inadvertent. The fact that the terminating event was not reasonably within the control of the corporation and was not part of a plan to terminate the election, or the fact that the event took place without the knowledge of the corporation, notwithstanding its due diligence to safeguard against such an event, tends to establish that the termination was inadvertent. Section 1.1362–4(c) provides that a taxpayer may request inadvertent termination relief by submitting a request for a private letter ruling. Section 1.1362–4(d) provides that the Commissioner may condition the granting of a ruling request on any adjustments that are appropriate. Section 1.1362–4(e) requires the corporation and all persons who were shareholders of the corporation at any time during the time specified by the Commissioner to consent to any adjustments that the Commissioner may require.

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 a shareholder of a small business corporation under § 1361(b)(1)). Pursuant to § 1361(d)(2)(A) and § 1.1361–1(j)(6)(i), the election by a current income beneficiary of a QSST may be made by the beneficiary’s legal representative (or a natural or an adoptive parent of the current income beneficiary if a legal representative has not been appointed and the current income beneficiary is a minor).

Section 1361(d)(2) provides for the time and manner in which the beneficiary of a QSST may elect to have the provisions of § 1361(d) apply. Included is the requirement that the QSST election must be filed within the 2 month and 16 day period beginning on the day that the stock is transferred to the trust.

Section 1361(d)(3) sets forth the provisions a trust instrument must contain for the trust to qualify as a QSST. Under § 1361(d)(3)(A), the terms of the trust must require that: (i) during the life of the current income beneficiary, there is only one income beneficiary; (ii) any corpus distributed during the life of the current beneficiary may be distributed only to that beneficiary; (iii) the current income beneficiary’s interest terminates on the earlier of the beneficiary’s death or the trust’s termination; and (iv) if the trust terminates during the current income beneficiary’s life, the trust assets must be distributed to that beneficiary. In addition, § 1361(d)(3)(B) requires that the trust must distribute all of its income (within the meaning of § 643(b)) currently to one individual who is a United States resident or citizen.

Rev. Proc. 94–23 provides automatic inadvertent termination relief to certain corporations whose S corporation election terminates because stock of the corporation was transferred to a trust whose current income beneficiary (or the legal representative of the current income beneficiary) inadvertently failed to file a timely election with respect to a QSST under § 1361(d)(2). Section 4 of that revenue procedure provides the prerequisites for automatic relief and the procedural requirements for obtaining it.

November 16, 1998 28 1998–46 I.R.B.

tensions) for the first year the corporation intended to be an S corporation has not passed. Section 4 of this revenue procedure describes a simplified method for obtaining relief where the corporation can demonstrate reasonable cause for the failure to file a timely S corporation election. Section 4 also provides automatic relief for ESBT, QSST, and QSub elections intended to be effective as of the first date the corporation intended to elect S corporation status for itself.

.03 Untimely QSub Elections. This revenue procedure also applies to certain QSub elections for which the automatic relief described above is not available because the parent corporation’s S election was timely filed. For those situations, this revenue procedure applies only to a corporation (1) for which a timely QSub election under § 1361(b)(3)(B) was not filed for the desired effective date, (2) for which a QSub election is filed within 12 months of the date that an election for the desired effective date should have been filed, and (3) for which the due date for the S corporation’s tax return (excluding extensions) for the first taxable year for which the S corporation desired QSub status for the subsidiary has not passed. Section 5 of this revenue procedure describes a simplified method, similar to that for a late S corporation election, for filing an untimely QSub election.

.04 Late ESBT and QSST Elections. For late ESBT or QSST elections, this revenue procedure applies to corporations that, but for (1) a trust beneficiary’s inadvertent failure to make a timely QSST election or (2) a trustee’s inadvertent failure to make a timely ESBT election, would otherwise meet or continue to meet the criteria for S corporation status. Section 6.02 of this revenue procedure provides an automatic grant of relief for certain corporations that satisfy the criteria therein.

.05 Alternate Relief. This revenue procedure provides alternatives to the letter ruling process ordinarily used to obtain relief for late S corporation and related elections under § 1362(b)(5), § 1362(f), or §§ 301.9100–1 and 301.9100–3. Accordingly, user fees do not apply to corrective action under this revenue procedure. However, a corporation or trust that does not meet the requirements for relief or is denied relief under this revenue pro

cedure may request inadvertent termination, inadvertent invalid election, or late election relief (as appropriate) by requesting a private letter ruling. The Service will not ordinarily issue a private letter ruling if the period of limitations on assessment under § 6501(a) has lapsed for any taxable year for which an election should have been made or any taxable year that would have been affected by the election had it been timely made. The procedural requirements for requesting a private letter ruling are described in Rev. Proc. 98–1, 1998–1 I.R.B. 7 (or its successor).