SECTION 6. ALTERNATIVE OR

OPTIONAL PROVISIONS FOR SAMPLE QUALIFIED PERSONAL RESIDENCE TRUST

.01 Contribution(s) of Cash to Purchase Personal Residence .

(1) Explanation . If the transferor does not currently own the personal residence that will constitute the trust corpus, cash may be transferred to the QPRT for the purchase of the initial residence. However, the purchase must take place within 3 months of the date the trust is created. Except for a nominal amount that may be required under state law to create the trust, before any contribution, the trustee must have previously entered into a contract to purchase that residence. Section 25.2702–5(c)(5)(ii) (A)(iii).

(2) Instructions for use . Replace Paragraphs A(1) and A(3) of Article II with the following paragraphs:

A(1) Cash for Purchase of Residence . The Transferor transfers $_____________ to the Trustee and confirms that the Transferor intends to transfer to the Trustee additional cash in an amount sufficient to allow the Trustee to purchase a residence to be used as a personal residence of the Transferor. The Trustee accepts that amount, agrees to hold it in a separate account, and agrees to use it and any additional cash contributed under Paragraph A(3)(d) of this Article to purchase, within 3 months after the date on which this trust is created, such a residence (hereinafter referred to as “the Residence”). The Trustee agrees to hold, manage, and distribute the Residence and any other trust property under the terms set forth in this instrument.

A(3) Additions to QPRT . From time to time, the Trustee may accept an addition of cash to the QPRT in an amount which, when added to any cash already held, does not exceed the amount reasonably required for: (a) the payment of QPRT expenses (including without limitation mortgage payments) already incurred or reasonably expected to be paid by the trust within 6 months after the date the addition is made; (b) the cost of improvements to the Residence to be paid by the trust within 6 months after the date the addition is made; (c) the purchase by the trust of a replacement Residence within 3 months after the

date the addition is made, provided that no addition may be made, or held by the Trustee, for this purpose unless the Trustee has, prior to receipt of the addition, entered into a contract to purchase that Residence; and (d) the purchase by the trust of the initial Residence within 3 months of the date the trust is created, provided that no addition may be made, or held by the Trustee, for the purchase of the initial Residence unless the Trustee has, prior to receipt of the addition, entered into a contract to purchase that Residence. The Trustee shall hold the additions of cash received in accordance with this paragraph in a separate account.

.02 Disposition of Trust Assets on Ces- sation as QPRT .

(1) Explanation . The sample trust provides that, if the trust ceases to qualify as a QPRT, the assets are to be held as a separate share in a GRAT pursuant to which a qualified annuity interest is to be paid to the transferor until the QPRT’s date of termination. Alternatively, the trust instrument may direct that the assets be returned to the transferor, or may give to a trustee, who is independent of the transferor, the discretion either to elect to return the assets to the transferor or to hold the assets in a GRAT. Section 25.2702–5(c)(8).

(2) Instructions for use if outright dis- tribution . If the assets are to be distributed outright to the term holder, delete all of Article III, delete the reference to GRAT at the end of Paragraph B of Article I and Paragraph B of Article IV, delete Paragraph D(3) of Article II, and replace Paragraph D(2) of Article II with the following paragraph:

D(2) Distribution on Cessation . Within 30 days after the date on which the trust ceases to be a QPRT with respect to any assets, the Trustee shall distribute those assets outright to the Transferor.

(3) Instructions for use if trustee’s dis- cretion . If the trustee is to be given the discretion to either distribute the assets outright or establish a GRAT, replace Paragraph D(2) of Article II with the following paragraph:

D(2) Distribution on Cessation . Within 30 days after the date on which the trust ceases to be a QPRT with respect to any of its assets, and after satisfying the provisions of Paragraph B(3) of this Article II, the Trustee shall distribute any trust assets with respect to which the

2003–23 I.R.B. 998 June 9, 2003

cable service center. Section 1.1361– 1(m)(2)(iii) provides that the ESBT election must be filed within the time requirements prescribed in § 1.1361–1(j)(6)(iii) for filing a QSST election (described above).

(2) Late ESBT and QSST Elections . Failure to properly make an election to be treated as an ESBT or a QSST may result in a shareholder who is not an eligible S corporation shareholder under § 1361(b)(1)(B) holding stock of the corporation. As a result, the failure to properly file an ESBT or QSST election may result in an inadvertent invalid S corporation election, or in an inadvertent termination of an S corporation election.

Section 1362(f) grants the Secretary (or his delegate) authority to provide relief if a corporation’s S corporation election was not effective for the taxable year for which it was made by reason of a failure to meet the requirements of § 1361(b) or to acquire the required shareholder consents. Under § 1362(f), the Secretary may also grant relief if the corporation’s S corporation election terminated 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, or to acquire the required shareholder consents, 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 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

as an S corporation (A) at any time during the preceding taxable year, or (B) at any time during the taxable year and on or before the 15th day of the 3rd month of the taxable year. Section 1.1362–6(a)(2) of the Income Tax Regulations provides that a corporation makes an election to be an S corporation by filing a completed Form 2553, Election by a Small Business Corpora- tion .

Under § 1362(b)(3), if an S corporation election is made for a taxable year after the 15th day of the 3rd month of that taxable year and on or before the 15th day of the 3rd month of the following taxable year, then the S corporation election is treated as made for the following taxable year.

(2) Late S Corporation Elections . Section 1362(b)(5) provides that if (A) an election under § 1362(a) is made for any taxable year (determined without regard to § 1362(b)(3)) after the date prescribed by § 1362(b) for making the election for the taxable year or no election is made for any taxable year, and (B) the Secretary determines that there was reasonable cause for the failure to timely make the election, the Secretary may treat the election as timely made for the taxable year (and § 1362(b)(3) shall not apply).

.02 QSub Elections . (1) In General . Section 1361 generally provides that an S corporation may elect to treat certain wholly owned subsidiaries as QSubs (as defined in § 1361(b)(3)(B)).

Section 1.1361–3 describes the time and manner for a corporation to make a QSub election. Section 1.1361–3(a)(2) provides that an S corporation may make a QSub election by filing the election form with the applicable service center. Form 8869, Quali- fied Subchapter S Subsidiary Election, is used to make a QSub election. The election to treat a subsidiary as a QSub may be filed at any time during the taxable year under § 1.1361–3(a)(3). Section 1.1361–3(a)(4) provides that the effective date is the date specified on the form (provided the date specified is not earlier than two months and 15 days before the date of the filing and the date specified is not more than 12 months after the date of the filing) or, on the date the election form is filed if no date is specified. If an election form specifies an effective date more than two months and 15 days prior to the date on which the election form is filed, it will be effective two

months and 15 days prior to the date it is filed. If an election form specifies an effective date more than 12 months after the date on which the election is filed, it will be effective 12 months after the date it is filed.

(2) Late QSub Elections . Under § 301.9100–1(c) of the Procedure and Administration Regulations, the Commissioner may grant a reasonable extension of time under the rules set forth in § 301.9100–2 and § 301.9100–3 to make a regulatory election, or certain statutory elections under all subtitles of the Code except subtitles E, G, H, and I. Section 301.9100–1(b) defines the term “regulatory election” as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin. Because a QSub election is a regulatory election, the Commissioner may permit a late QSub election under the rules set forth in § 301.9100–3.

.03 ESBT and QSST Elections . (1) In General . Section 1361(b)(1)(B) limits the permitted shareholders of an S corporation to domestic individuals, estates, certain trusts, and certain exempt organizations.

Section 1361(d)(1)(A) provides that a QSST (as defined in § 1361(d)(3)(A)) is a permitted S corporation shareholder if the beneficiary of the QSST makes an election under § 1361(d)(2). 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 guardian or legal representative (or a natural or an adoptive parent of the current income beneficiary if a legal representative has not been appointed) if the current income beneficiary is a minor. A QSST election is made by signing and filing an election statement with the applicable service center. Section 1.1361– 1(j)(6)(iii) provides that the QSST election must be made within the 16-day-and-2month period beginning on the day that the S corporation stock is transferred to the trust.

Section 1361(c)(2)(A)(v) provides that an ESBT (as defined in § 1361(e)) is a permitted S corporation shareholder. To qualify as an ESBT, the trustee of the trust must make an ESBT election by signing and filing an election statement with the appli

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Election Under Subchapter S is specified by § 1362(b). For ESBT or QSST elections, the Due Date of the Election Under Subchapter S is specified by § 1.1361– 1(m)(2)(iii) or § 1.1361–1(j)(6)(iii), respectively. The Due Date of the Election Under Subchapter S for a parent S corporation to make an election to treat a subsidiary as a QSub on a specific date is specified by § 1.1361–3(a)(3).

.02 Eligibility for Relief . Relief is available under section 4.04 of this revenue procedure if the following requirements are met:

(1) The entity fails to qualify for its intended status as an S corporation, ESBT, QSST, or QSub on the first day that status was desired solely because of the failure to file the appropriate Election Under Subchapter S timely with the applicable service center;

(2) Less than 24 months have passed since the original Due Date of the Election Under Subchapter S;

(3) Either, (a) the entity is seeking relief for a late S corporation or QSub election and the entity has reasonable cause for its failure to make the timely Election Under Subchapter S, or

(b) the S corporation and the entity are seeking relief for an inadvertent invalid S corporation election or an inadvertent termination of an S corporation election due to the failure to make the timely ESBT or QSST election and the failure to file the timely Election Under Subchapter S was inadvertent; and

(4) Either, (a) all of the following requirements are met: (i) the entity seeking to make the election has not filed a tax return (in the case of QSubs, the parent has not filed a tax return) for the first year in which the election was intended, (ii) the application for relief is filed under this revenue procedure no later than 6 months after the due date of the tax return (excluding extensions) of the entity seeking to make the election (in the case of QSubs, the due date of the tax return of the parent) for the first year in which the election was intended, and, (iii) no taxpayer whose tax liability or tax return would be affected by the Election Under Subchapter S (including all shareholders of the S corporation) has reported inconsistently with the S corporation election (as well as any ESBT, QSST

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 corporation may request inadvertent termination relief by submitting a request for a 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.

The Service will grant relief for both the late QSST and ESBT election and the inadvertent termination of the S corporation election (or inadvertent invalid S corporation election) if the standard described in section 1362(f) for an inadvertent termination of an S corporation election or an inadvertent invalid S corporation election is satisfied.