Checklists for determining whether a trust is a valid S shareholder.This checklist is intended to help CPAs spot issues in determining whether a trust is eligible to hold S corporation stock. It has four parts; a trust needs to meet the criteria criteria (krītēr´ē  ),n. of Part I, II, III or IV to be a valid S shareholder. For example, a trust that does not qualify as a qualified subchapter S Subchapter S IRS regulation that gives a corporation with 35 or fewer shareholders the option of being taxed as a partnership to escape corporate income taxes. mist (QSST QSST Qualified Subchapter S Trust QSST Quiet Small Supersonic Transport QSST Quiet Supersonic Transport ) under Part I might qualify as an electing small business trust (ESBT) under Part II, or meet the requirements of Part III or IV. For a QSST election, the trust beneficiary beneficiary Person or entity (e.g., a charity or estate) that receives a benefit from something (e.g., a trust, life-insurance policy, or contract). A primary beneficiary receives proceeds from a trust or insurance policy before any other. chooses whether to elect separately for each S corporation whose stock is owned by the trust. For example, a mast mast, large metal or timber pole secured vertically or nearly vertically in a ship, used primarily for supporting sails and rigging. The mast is as old as sailing vessels, and the oldest sailboats depicted (those of ancient Egypt) had a small mast placed forward and might have a QSST election in place for stock in one S corporation it owns, but not for another. A QSST election might be timely as to one S corporation and late as to another. In any event, if a QSST election is made, it applies only to the S corporation named in the election. Although the checklist provides deadlines, a failure to satisfy them will not necessarily be fatal if remedial action A remedial action is a change made to a nonconforming product or service to address the deficiency. Rework and repair are generally the remedial actions taken on products, while services usually require additional services to be performed to ensure satisfaction. is taken. Generally, if a late ESBT or QSST election is caught within 24 months of the election's original due date, Rev REV Revolution REV Reverse REV Reverend REV Revision REV Review REV Revised REV Revelations (bible) REV Reversal REV Revolver (Beatles album) REV Reverendo . Proc. 2003-43, 2003-1 CB 998, might provide expedited relief. If the late election does not qualify for Rev. Proc. 2003-43 relief, a letter ruling might provide relief under Sec. 1362(f) from the associated inadvertently invalid S Null; void; without force or effect; lacking in authority. For example, a will that has not been properly witnessed is invalid and unenforceable. INVALID. In a physical sense, it is that which is wanting force; in a figurative sense, it signifies that which has no effect. election or inadvertent S termination The point where a line, channel or circuit ends. See SCSI termination and hybrid. . Congress mandated the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. to be very lenient le·ni·ent adj. Inclined not to be harsh or strict; merciful, generous, or indulgent: lenient parents; lenient rules. in granting inadvertent termination relief, as long as the taxpayer has made an honest mistake and all of the affected shareholders consent to the relief. However, tax advisers should consult applicable authority and make their own determination. Finally, special attention should be paid to the limit on the number of shareholders. Each of the eligible masts A mast is a man-made support structure, commonly used on sailing ships as support for sails, or on land as radio masts and towers used to support telecommunication equipment such as radio antennas ("aerials" in the UK). This is a list of masts 300 meters or higher. has specific rules as to which individuals are treated as owners for purposes of this limit. A mist qualifying as an eligible shareholder may cause the number of S shareholders to exceed the 100 limit (75 for years beginning before 2005) and, thus, terminate Terminate (terminat.exe) was a shareware modem terminal and host program for MS-DOS and compatible operating systems developed from the early to the late 1990s by the Dane Bo Bendtsen. The last release (5. the S election. Spouses always count as one shareholder for purposes of the number-of-shareholders test. For tax years beginning after 2004, members of a qualifying family are treated as one shareholder, allowing the actual number of shareholders to significantly exceed 100. For purposes of the 100 limit role in general, and the family rule in particular, a person is not counted twice even if that person owns or is deemed to own S stock in more than one capacity (e.g., as a direct owner, as a current income beneficiary Income beneficiary One who receives income from a trust. of a QSST, or as a potential current beneficiary of an ESBT). This checklist is not intended to (and does not) address every possible mast situation, such as those involving exempt trusts covered in Sec. 1361(c)(6). It should be used to determine whether a mast can validly hold S stock. Authors' note: The authors thank the 2004-2005 AICPA AICPA See American Institute of Certified Public Accountants (AICPA). S Corporation Taxation Technical Resource Panel for its review of this manuscript manuscript, a handwritten work as distinguished from printing. The oldest manuscripts, those found in Egyptian tombs, were written on papyrus; the earliest dates from c.3500 B.C. . THE AICPA S TRUST TASK FORCE (SYDNEY S Sydney, city, Australia Sydney, city (1991 pop. 3,097,956), capital of New South Wales, SE Australia, surrounding Port Jackson inlet on the Pacific Ocean. Sydney is Australia's largest city, chief port, and main cultural and industrial center. . TRAUM, CHAIR; STEVEN Ste´ven n. 1. Voice; speech; language. Ye have as merry a steven As any angel hath that is in heaven. - Chaucer. 2. An outcry; a loud call; a clamor. To set steven to make an appointment. J. BROWN AND STEVEN B. GORIN Gorin is an air base in Amur Oblast, Russia located 75 km northwest of Komsomolsk-na-Amure. It contains a 1 km long remote tarmac on the north side. A noteworthy major, but remote airfield. It may have been intended for dispersion of intermediate-range bombers during a Sino-Soviet conflict. , MEMBERS; LAURA Laura, subject of the love poems of Petrarch. She is thought to be Laura de Noves (1308?–1348), wife of Hugo de Sade, but this has not been proved. Laura Petrarch’s perpetual, unattainable love. [Ital. Lit. HOWELL-SMITH AND KENNETH N. ORBACH Orbach may refer to:
I. QSST Determination (Sec. 1361(d))
Name of S corporation--
Questions Yes/No Date Completed
1. Is the trust a domestic trust? -- --
* If no, the trust does not qualify; see
Sec. 701(a)(31)(B) and (a) (30)(E) for
the definitions of foreign and domestic
trusts.
2. Do the trust terms permit more than one
income beneficiary during the current
income beneficiary's life? -- --
* If yes, the trust does not qualify as a
QSST unless the separate share rules
apply (see Question #3).
3. If there is more than one current income
beneficiary, is the trust set up in such a
way so that each such beneficiary has a
separate share under Sec. 663(c)? -- --
* If no, the trust does not qualify as a
QSST.
4. Is the current income beneficiary a U.S.
citizen or resident? -- --
* If no, the trust does not qualify as an S
shareholder.
5. Do the trust terms allow corpus
distributions only to the current income
beneficiary during his or her life? -- --
* If no, the trust does not qualify as a
QSST.
6. Do the trust terms provide that the current
income beneficiary's income interest in the
trust terminates on the earlier of the
death of the current income beneficiary or
the termination of the trust? -- --
* If no, the trust does not qualify as a
QSST.
7. Do the trust terms provide that if the
trust terminates during the current income
beneficiary's life, all trust assets must
be distributed to that current income
beneficiary? -- --
* If no, the trust does not qualify as a
QSST.
8. Do the trust terms require all trust
accounting income to be distributed at
least annually? -- --
* If no, such income must actually be
distributed to the current income
beneficiary at least annually for the
trust to qualify as a QSST.
* Trust accounting income is generally
determined by applicable local law and
trust provisions. Trust accounting income
generally includes distributions to the
trust from the S corporation and is
frequently different from the trust's
pro-rata share of the S corporation's
items of income, loss, deductions or
credits.
9. Under the trust instrument or under
applicable state law, can anyone besides
the current income beneficiary receive any
benefit from the trust while the current
income beneficiary is alive? -- --
* If yes, the trust does not qualify as a
QSST.
10. Can payments be made from the trust that
will discharge someone else's obligation
to support the current income beneficiary?
For instance, some state laws may require
a parent to provide a child's school
tuition. -- --
* If yes, the trust does not qualify as a
QSST.
11. Did the current income beneficiary make a
QSST election with respect to this S
corporation? -- --
* If no, the trust does not qualify as a
QSST, unless the current income
beneficiary is a successor beneficiary
that does not affirmatively refuse to
consent as to this S corporation (see
Question #20 for possible late election
relief). But it may be a QSST with
respect to another S corporation for
which the current income beneficiary
has made a valid QSST election.
12. Is the current income beneficiary a
successor to a previous current income
beneficiary? -- --
* If yes, and he or she filed an
affirmative refusal to consent to the
QSST election, the trust no longer
qualifies as a QSST.
13. If the trust held stock before the
corporation made an S election, did the
then-current income beneficiary sign the
consent of shareholders for the S election? -- --
* If no, remedial action needs to be taken
for the S election to be effective; see
Sec. 1362(f) and Regs. Sec.
1.1362-6(b)(3)(iii).
* If the spouse of a shareholder in a
community property state, who is a
shareholder solely pursuant to state
community property law, fails to consent
to the S election, Rev. Proc. 2004-35,
IRB 2004-23, 1029, provides relief
procedures.
14. Was the QSST election either mailed
certified, return receipt requested,
or filed by hand with a copy stamped
by the IRS? -- --
* Under Prop. Regs. Sec. 301.7502-1(e)(1),
direct proof of actual delivery and
registered or certified mail are the
exclusive means to establish prima facie
evidence of delivery of the election.
When finalized, this rule will apply to
all documents mailed after Sept. 21,
2004.
15. Does the QSST election contain all of the
information required by Regs. Sec.
1.1361-1(j) (6)(ii)? -- --
16. Was the QSST election filed with the same
Internal Revenue Service Center where
the S corporation files its return? -- --
17. Did the IRS accept the QSST election? -- --
* A copy of the QSST election should be
kept in the files.
18. If the trust held the corporate stock
before the S election was made, was the
QSST election filed within two months and
15 days after the earlier of the date on
which the S election was (1) filed or (2)
effective? -- --
* If not, remedial action needs to be
taken for the S election to be
effective.
19. If the S election was effective before the
stock was transferred to the trust, was
the QSST election filed no later than two
months and 15 days after the transfer date? -- --
* A QSST election may not be made before
the trust's acquisition of the S stock.
20. If the QSST election was not filed on
time, was the late filing due to
inadvertence? See Rev. Proc. 2003-43 for
relief. -- --
21. If the trust currently is an ESBT, does it
wish to convert to a QSST? -- --
* If yes, the IRS must consent to the
revocation of the ESBT election,
generally via a letter ruling request;
but see Regs. Sec. 1.1361-1(m)(7) for
circumstances under which such consent
is automatically granted.
22. Does the current income beneficiary
understand that he or she must report all
of the S corporation tax items
attributable to the S stock owned by the
QSST on his or her personal income tax
return? -- --
* This attribution to the current income
beneficiary does not apply to the tax
consequences of the trust's disposition
of the S stock.
* For example, if the trust sells S stock,
gain or loss is recognized by the trust,
not the current income beneficiary.
However, a disposition of S stock by the
trust after 2004 is considered made by
the current income beneficiary for
purposes of applying the Sec. 465
at-risk rules and the Sec. 469 passive
activity loss rules to the beneficiary.
23. When the current income beneficiary is
added to the number of other shareholders,
will the total exceed the allowable limit? -- --
* If yes, although the trust may qualify
as a QSST, the S election will
terminate.
Note: For a QSST, a husband and wife are treated
as one current income beneficiary if they
file a joint income tax return and each is a U.S.
citizen or resident.
II. ESBT Determination (Sec. 1361(e))
1. Does the trust have only individuals,
estates or qualified exempt organizations
as beneficiaries? -- --
* Generally, a beneficiary, as used in this
question, is broader than, but includes,
the term "potential current beneficiary"
and includes a person who has a present,
remainder or reversionary interest in the
trust; compare Regs. Sec.
1.1361-1(m)(1)(ii) with Regs. Sec.
1.1361-1(m)(4) (as modified by Sec.
1361(e)(2)).
* A person in whose favor a power of
appointment could be exercised is not an
ESBT beneficiary or potential current
beneficiary (due to such power), unless
the power is actually exercised in
favor of that person.
* A beneficiary who is not an eligible
shareholder who later becomes a potential
current beneficiary will terminate the S
election, if not cured as provided in
Sec. 1361(e)(2).
* A qualified exempt organization is
defined in Sec. 170(c)(2)-(5), or in
170(c)(1) to the extent it holds a
contingent interest and is not a
potential current beneficiary.
2. When the potential current beneficiaries
are added to the number of other
shareholders, will the total number exceed
the allowable shareholder limit? -- --
* If yes, the S election is terminated.
* Every potential current beneficiary
counts as a shareholder with respect to
the allowable shareholder limit.
* A potential current beneficiary is a
person or organization that is entitled
to or may currently receive distributions
from the trust's principal or income.
3. Is each potential current beneficiary an
eligible shareholder? -- --
* If no, the S election is terminated; see
Sec. 1361(b)(1).
4. If the trust currently is a QSST, does it
wish to convert to an ESBT? -- --
* If yes, the IP, S must consent to the
revocation of the QSST election,
generally via a letter ruling request;
but see Regs. Sec. 1.1361-1(j)(12) for
circumstances under which such consent is
granted automatically.
5. Is the trust a charitable remainder trust
(CRT)? -- --
* A CRT cannot qualify as an ESBT.
6. Is the trust exempt from income tax? -- --
* If yes, the trust is not an ESBT.
7. Has any person acquired an interest in the
trust by purchase? -- --
* If yes, the trust does not qualify as an
ESBT.
* A purchase includes any transaction for
which the basis of acquired property is
cost.
8. Does the ESBT election include all
information as required by Regs. Sec.
1.1361-1(m)(2)? -- --
9. Did the trustee sign the ESBT election? -- --
10. Was the ESBT election timely filed? -- --
11. If the ESBT election was not filed on
time, was the late filing due to
inadvertence? See Rev. Proc. 2003-43
for relief. -- --
12. Was the ESBT election either mailed
certified return receipt, or filed by hand
with a copy stamped by the IRS? -- --
* Under Prop. Regs. Sec. 301.7502-1(e)(1),
direct proof of actual delivery and
registered or certified mail are the
exclusive means to establish prima facie
evidence of delivery of the election.
When finalized, this rule will apply to
all documents mailed after Sept. 21,
2004.
13. Was the ESBT election filed with the same
Internal Revenue Service Center where the
S corporation files its return? -- --
14. If the ESBT initially owns stock in more
than one S corporation, and the S
corporations file returns in multiple
service centers, was the ESBT election
filed in all relevant Internal Revenue
Service Centers where the S corporations
file returns? -- --
Note: Unlike a QSST election (which must be
made separately for each S corporation
whose stock the QSST owns), an ESBT election
generally needs to be filed only once, unless
the multiple Internal Revenue Service Center
situation above applies.
15. Did the IRS accept the ESBT election? -- --
* Retain proof of mailing.
16. If the trust held the stock before the S
election was made, was the ESBT election
filed within two months and 15 days after
the earlier of the date on which the S
election was (1) filed or (2) effective? -- --
* If not, remedial action needs to be
taken for the S election to be
effective.
17. If the S election was effective before the
stock was transferred to the trust, was
the ESBT election filed no later than two
months and 15 days after the date of the
transfer? -- --
* If not, remedial action needs to be taken
for the S election to remain effective.
III. Inter Vivos Trust Determination
1. Is a U.S. citizen or resident treated as
the deemed owner of the entire trust?; see
Secs. 671-678. -- --
* If no, go to Question #2.
* If yes, the trust qualifies as an S
shareholder while the deemed owner is
alive.
* It appears that grantors who are husband
and wife (both of whom are U.S. citizens
or residents) are treated as one deemed
owner for this purpose; see Regs. Sec.
1.1361-1(e)(2) and-1(k)(1), Example (1).
A substantially separate and independent
share of a trust (within the meaning of
Sec. 663(c)) is treated as a separate
trust for this purpose; see Regs.
Sec. 1.1361-1(j)(3).
2. Is the trust a voting trust under Sec.
1361(c)(2)(A)(iv)? -- --
* If no, go to Question #3.
* If yes, and if the trust meets the
requirements under Regs. Sec.
1.1361-1(h)(1)(v), the trust qualifies as
an S shareholder and the beneficiaries
are deemed the owners of the trust's
stock.
3. Is the trust a QSST or an ESBT under Part
I or II above? -- --
* If no, and Questions #1 and #2 above are
both answered negatively, the trust does
not qualify as an S shareholder unless it
is an exempt trust described in Sec.
401(a) or 501(c)(3). In addition, an IRA
(including a Roth IRA) is a permitted
shareholder of an S corporation bank or a
depository institution holding company,
but only to the extent of the bank or
holding company stock held by the IRA on
Oct. 22, 2004.
4. When the deemed owners are added to the
other shareholders, does the total number
of shareholders exceed the allowable limit? -- --
* If yes, the S election terminates.
IV. Subpart E Trust after The Grantor's (or
Other Deemed Owner's) Death and Testamentary
Trust Determination
1. Was the trust a qualified subpart E trust
(i.e., all of which is treated as owned by
an individual who was a U.S. citizen or
resident) immediately before the deemed
owner's death, that continues in existence
after the decedent's death? -- --
* If so, the trust remains a permitted S
shareholder until the day preceding the
second anniversary of the deemed owner's
death.
* After the two-year period, the former
subpart E trust will not be a permitted S
shareholder, unless it otherwise
qualifies as a qualified subpart E trust,
a QSST or an ESBT.
* For income tax purposes, if the trust was
a qualified revocable trust under Sec.
645 immediately before the decedent's
death and a proper Sec. 645 election was
made, the trust is treated during the
Sec. 645 election period not as a
separate trust but, rather, as the estate
or part of the estate.
* If the trust includes withdrawal powers,
it may or may not be a Sec. 678 trust,
all of which is treated as owned by one
individual. If not, an ESBT election
should be considered.
2. Was the trust created under a will (a
testamentary trust)? -- --
* If so, the trust is a permitted
S shareholder, generally for the two-year
period beginning on the day the stock is
transferred to the trust.
* For this purpose, a testamentary trust
also includes: (1) a trust to which S
stock is transferred during the Sec. 645
election period pursuant to the terms of
a qualified revocable trust for which a
valid Sec. 645 election has been made;
and (2) the deemed new trust to which S
stock is deemed distributed at the close
of the last day of the Sec. 645 election
period of a qualified revocable trust for
which a valid Sec. 645 election has been
made; see Regs. Secs.
1.1361-1(h)(1)(iv)(B) and 1.645-1(h)(1).
* After the two-year period, the
testamentary trust will not be a
permitted S shareholder, unless it
otherwise qualifies.
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