Current developments.

This two-part update on S corporation developments reviews and analyzes the recent past's rulings and decisions. Many of the rulings focused on the liberalized S provisions incorporated into the Small Business Job Protection Act of 1996. Part I addresses rulings on S eligibility, elections and terminations.

From a tax perspective, the period covered in this update--July 16, 1997 to July 15, 1998--focused on implementing the significant S corporation changes made by the Small Business Job Protection Act of 1996 (SBJPA). Because of the many newly created or converted S corporations, many letter rulings, notices, proposed regulations and revenue procedures reflected the 1996 legislative changes regarding qualified subchapter S subsidiaries (QSSSs), qualified subchapter S trusts (QSSTs) and electing small business trusts (ESBTs); in addition, Rev. Proc. 97-48(1) grants automatic relief and waives the letter ruling user fee for certain late S elections.

As will be discussed in Part II of this article, in the November 1998 issue, S operational issues continued to be addressed by the courts and Treasury, including passive activity loss use; Peracchi,(2) a Ninth Circuit Sec. 357(c) decision; cancellation of debt income; deduction of interest paid on tax deficiencies; and back-to-back loans.

The expanded availability of S status means that more sophisticated issues are being addressed in letter rulings--Sec. 338(h)(10) ruling requests, Crummey trusts, charitable remainder unitrusts, check-the-box applications, disregarded entities, tax-free conversions to tax-exempt status, application of step-transaction doctrine to QSSS elections and complicated phantom stock option and split dollar life insurance plans.

Statistics for 1995 reveal the C, S and partnership audit rates.(3) Of the total S returns flied in 1994 and 1995, .92% were audited. This is to be contrasted with C returns, for which the audit rate was between 2.18%-14%, depending on the dollar value of assets; the partnership audit rate ranged between .46% and .49%.

Eligibility, Elections and Terminations

The general definition of an S corporation in Sec. 1361 includes significant restrictions on the type and number of shareholders, as well as the type of corporations, that qualify for S status. If an S corporation violates any of these restrictions, its S election automatically terminates. However, the taxpayer can request an inadvertent termination ruling under Sec. 1362(f) and retain its S status continuously. The IRS, at the urging of Congress, has been reasonable in granting inadvertent termination relief.

Prior to the SBJPA, the IRS had no authority to allow late S elections. Sec. 1362(b)(5) now gives the IRS the power to correct inadvertent errors in electing S status if the taxpayer shows that it made the mistake inadvertently, qualified to be an S corporation and acted as though it were an S corporation. A plethora of inadvertent election rulings were issued in the period covered.

Some commentators have suggested that S status will not be the future entity of choice because of the increased popularity of limited liability companies (LLCs), yet literally hundreds of ruling requests have involved new businesses making mistakes in electing S status. In some of the more interesting rulings to date regarding a new enterprise, practitioners filed a Form SS-4, Application for Employer Identification Number, and thought it was sufficient to elect S status.(4) The IRS allowed S status effective as of the entity's date of incorporation.

In Letter Ruling 9812023,(5) the entity had fred a C return for two tax years; thus, it had to amend its filed Form 1120, U.S. Corporation Income Tax Return, to file Form 1120S, U.S. Income Tax Return for an S Corporation. A natural consequence of this was that its shareholders had to amend several years' individual returns to reflect S status from the corporation's inception.

Filing an S Election

To qualify as an S corporation, the corporation and all the shareholders on the date of the election (as well as other affected shareholders) must file a valid, timely Form 2553, Election by a Small Business Corporation (under section 1362 of the Internal Revenue Code). This election should be sent by certified mail (return receipt requested), registered mail or pre-approved private delivery service (e.g., Federal Express, Airborne Express or DHL). In Letter Ruling 9748033,(6) the IRS granted S status from the date of incorporation, even though the IRS never received the election and there was no proof of mailing. A similar situation arose in Letter Rulings 97510137 and 9752010,(8) in which the IRS allowed S status from the corporation's inception, under Sec. 1362(b)(5).

Continuing the trend, Rev. Procs. 97-40(9) and 97-48 allow late S elections without the need for a letter ruling. The fact that this error correction may be retroactive can create the need for amended tax returns at both the corporate and shareholder levels. For example, in Letter Ruling 9807022,(10) a corporation erroneously filed as an S corporation, filed three years of amended Forms 1120, then amended the C returns after permission was granted to file as an S corporation. Likewise, the shareholders were required to amend their individual returns multiple times.

In Letter Ruling 9745006,(11) a healthcare consulting company owned by one shareholder requested an employee to file Form 2553, but the IRS never received it. The IRS notified the company that no S election was on file. The corporation amended its S return and fred a C return. When Sec. 1362(b)(5) was held to apply, it had to amend its return back to Form 1120S.

Rev. Proc. 97-48 specifies two situations in which automatic relief is granted for a late S election, without the need for a letter ruling request (and the accompanying user fee). The first situation occurs when a corporation always intended to be an S corporation, the corporation and its shareholders filed their returns consistent with this intent for all relevant years, and the Service did not notify the corporation that there was a problem with S status within six months of the date the first Form 1120S was timely fred.

The second situation is more narrow and occurs because of the retroactive nature of Sec. 1362(b) (5). It only applies to tax years beginning before 1997, in which the corporation intended to be an S corporation; however, due to a late election, it was required to file a Form 1120 for its first tax year. It elected S status for subsequent years and all relevant tax years for both corporations and its shareholders are open.

If either of these fact patterns is met, a completed Form 2553 must be fred with the Service Center with the statement "FILED PURSUANT TO REV. PROC. 97-48" at the top of the form and a dated declaration that the requirements are met. This procedure (like its companion, Rev. Proc. 97-40) does not apply to late shareholder elections, including QSST or ESBT elections.

In many of the rulings granting relief, an owner, lawyer, accountant or financial consultant forgot to mail or fill out Form 2553, but the corporation fried a Form 1120S and the shareholders included their share of income on their individual returns.(12) In Letter Ruling 9735008,(13) a CPA timely prepared Form 2553 and asked the S owner to sign and file it as soon as possible. Although the due date was Dec. 19, 1995, the owner filed it on Jan. 2, 1996, when he returned to the U.S. The IRS permitted S status from corporate inception.

The IRS issued numerous rulings under `Sec. 1362 (b) (5), allowing S status from each corporation's inception.(14) In Letter Ruling 9824012(15) the company's accountant and lawyer each thought the other was going to file Form 2553; neither did.

In other rulings,(16) new companies fried Form 1120S, but never fried Form 2553. The IRS found reasonable cause for failure to file a timely election and granted relief in each case.

Corporate Eligibility

One class of stock: Sec. 1361(b)(1)(D) prohibits an S corporation from having more than one class of stock, defined as differing economic rights (distributions and liquidations) rather than different voting rights. In Letter Ruling 9745011,(17) a C corporation with a second class of stock converted to S status. When the error was recognized, the corporation redeemed the second class of stock. The IRS ruled this inadvertent and granted S status. (An E reorganization generally results in a superior tax result than a Sec. 302 redemption.)

When S corporations set up employment or consulting agreements, profit-sharing pools and other fringe benefits for its employees or owners, there has been concern that this may be interpreted as a second class of stock. Letter Ruling 9803008(18) provides a list of situations that do not create a second class of stock under Regs. Sec. 1.13611. For example, the ownership of stock as tenants-in-common was not a partnership; rights of first refusal, buy-sell agreements, profit-sharing pools, phantom stock options and split-dollar life insurance plans did not create a second class of stock.

Letter Ruling 9803023(19) held that an S corporation's phantom stock option plan was not a second class of stock under Regs. Sec. 1.1361-1(b)(4); there were, no voting or dividend rights, and it was an unsecured promise to pay issued in connection with service to an employer. Similarly, Letter Ruling 9817015(20) approved a nonqualified deferred "share unit" compensation scheme offered by an S corporation to some of its employees.

In Letter Ruling 9821006,(21) an S corporation was the target of a buyout that included a contingent purchase price for some shareholders and a larger immediate purchase price for others. The IRS held that because this was not a governing provision and it was possible the payouts to the two groups of shareholders would be roughly equal in value, despite the timing differences, it was not a second class of stock. Because the acquiring company and the target shareholders were electing under Sec. 338 and 338(h)(10), respectively, the selling corporation's shareholders picked up the gain at the individual level.

In Letter Ruling 9814003,(22) a family-owned grocery business wanted to redeem some of its shareholders' stock. The redemption agreement called for the purchase price to be based on a bank's determination of fair market value. The redemption plan was held not to cause a second class of stock.

QSSSs: Prior to the SBJPA, a myriad of rulings addressed the inadvertent termination of S status because a corporation had acquired 80% or more of another domestic or foreign corporation. After the modification of Sec. 1361(b)(2) to allow affiliated groups, and the addition of Sec. 1361(b)(3), which allows QSSSs, there has been a dramatic decrease in affiliated group rulings. In its place are a variety of QSSS rulings and Sec. 1361 proposed regulations that clarify some issues and confound others.

The SBJPA's amendment to Sec. 1361(b)(2) did not specify the filing requirements for electing QSSS status. Therefore, Notice 97-4(23) was issued to offer guidance. The notice covers both newly formed companies, existing wholly owned subsidiaries and newly acquired companies. When Form 966, Corporate Dissolution or Liquidation, is filed, a QSSS election should also be made on Form 966. In effect, the subsidiary is liquidated tax-free under Secs. 332 and 337. The effective date of the QSSS election is the date the Form 966 is filed or up to 75 days before.

Proposed regulations(24) modify Notice 97-4, and will both greatly explain and complicate the QSSS election and termination rules when made final. Prop. Regs. Sec. 1.1361-3(a)(1) envisions that the IRS will create a QSSS election form before the regulations become final that an S parent will fill out for a new or existing QSSS, instead of Form 966. The QSSS election (or revocation) would not have to be made within two and one-half months of the beginning of the year to be retroactive; the parent could choose a prospective date of no more than a year later to elect or revoke the election. Thus, if a calendar-year S corporation bought 100% of a C corporation on May 5, 1998, it could elect QSSS status for that date or for as late as July 20,1998.

The proposed regulations discuss several issues that could create problems. For example, if an S corporation owns less than 80% of a subsidiary and buys the remaining 20% to qualify the latter as a QSSS, it may be viewed under Rev. Rul. 67-274(25) as a D reorganization; liabilities greater than adjusted bases of assets may give rise to gain under Sec. 357(c).

Similarly, if a C corporation is 79% owned by an S corporation and 21% owned by the S shareholders, the contribution of the 21% ownership to the S corporation followed by the QSSS election (a deemed liquidation) could be viewed under the step-transaction doctrine as a defective C reorganization and be a taxable event.

[Figure ILLUSTRATION OMITTED]

Also, if a shareholder owns brother-sister S corporations, contributes stock of one to the other and elects QSSS status for the new subsidiary, the step-transaction doctrine may make this group of transactions taxable. Prop. Regs. Sec. 1.1361-(4) (a) (5) (i) includes a transition rule for the avoidance of the step-transaction doctrine, but it expires 60 days after the regulations are finalized. Prop. Regs. Sec. 1.1361-4(c) allows use of suspended losses from the S corporation that becomes the QSSS when the shareholder's adjusted basis in the stock is increased.

Notice 97-4 and Prop. Regs. Sec. 1.1361-4(b) (3) provide that if a qualified stock purchase occurs prior to the QSSS election and Sec. 338 is elected, the latter is effective before the Secs. 332 and 337 rules apply. (However, not all states have conformed their tax laws to allow QSSSs.)

Normally, if a QSSS election is revoked, it cannot be re-elected for five years without IRS consent. Prop. Regs. ,Sec. 1.1361-5(d)(2) provides that if the QSSS is revoked, but the corporation was never a C corporation after the revocation, an S election is permissible without IRS consent. In Letter Ruling 9823016,(26) the IRS permitted a second S election in less than five years. In a corporate reorganization, an S parent elected QSSS status for its wholly owned subsidiary, then spun off the QSSS to its shareholder, who elected S status for the subsidiary.

If the disregarded entity's QSSS election is revoked, Sec. 351 would apply to the deemed formation. The tax adviser should be aware of the consequences of Sec. 357(c), when liabilities exceed the adjusted basis of the assets transferred.

Most of the recent S rulings involved the late filing of a QSSS election. For example, Letter Ruling 9748024(27) involved an S corporation that wanted to reorganize its business activities and convert 25 S corporations into QSSSs. The parent had failed to comply timely with Notice 97-4. Nevertheless, the IRS granted an extension for filing the QSSS election. Similarly, in Letter Ruling 9826009,(28) a company was granted an extension to file a QSSS election within 30 days of the ruling.

In Letter Ruling 9801015,(29) a C corporation was to be converted to a QSSS. The S parent was inquiring whether a Sec. 1374 built-in gains (BIG) tax would be immediately triggered by the conversion. The IRS ruled that the Sec. 332 liquidation would not trigger the tax, but the transaction would be a carryover-basis transaction covered by Sec. 1374(d)(8); a new 10-year period would begin on the date of the liquidation. Thus, if the parent converted seven years ago from C to S, it would have only three years left for BIG tax purposes, but it would have a new 10-year recognition period for the carryover-basis assets it received from its subsidiary.

The procedures outlined in Notice 97-4 to elect QSSS status also apply to a new company to be designated a QSSS. In Letter Ruling 9810018,(30) the IRS granted an extension of time for filing the QSSS election for a new entity. Similarly, in Letter Rulings 9814009(31) and 9825028,(32) a new corporation was formed to be a QSSS. The S parent did not file a Form 966 for the new entity. The IRS held that as long as the form was filed within 60 days of the ruling, the QSSS would be valid from the date of the new corporation's inception.

E&P issues: If an S corporation has accumulated C earnings and profits (AE&P), it must carefully monitor the composition of its gross receipts, for two reasons. First, if it does not purge its AE&P and has excess passive investment income (PII) (i.e., more than 25% of gross receipts) for three consecutive years, its S status will terminate in the fourth year. Second, a Sec. 1375 tax is imposed on excess net PII, as defined in Sec. 1375(b)(1).

In Letter Ruling 9752058,(33) an S corporation with AE&P received net rental income that exceeded 25% of its gross receipts for three consecutive years. Technically, the company's S election terminated on the first day of the fourth year. As soon as the accountants discovered the error, the company distributed a dividend to its shareholders to deplete its AE&P. The IRS ruled that the termination was inadvertent and required a corporate-level payment. It is not clear what this payment was for; presumably, it was the Sec. 1375 liability.

Regs. Sec. 1.1368-1(f)(3) allows a deemed distribution that would have obviated the need for an actual distribution. Also, Sec. 1368(e)(3)(A) allows any deemed or actual distribution to be from AE&P rather than the accumulated adjustments account (AAA). In Thurman,(34) a corporation with several million dollars of AE&P made distributions; it never filed a statement to treat the distributions as not made first out of the AAA, and never so indicated on returns. The company argued "substantial compliance" with the election requirements, but the Tax Court rejected the company's position.

Most of the rulings dealt with whether rental activities were active or passive for purposes of Sec. 1362(d)(3)(C). Regs. Sec. 1.13622(c) (5)(ii) 03) requires that either significant services be performed or significant costs be incurred to elevate the activity to nonpassive. In several rulings,(35) rentals from warehouses, industrial buildings, luxury apartments and commercial real estate were all deemed to be active. In Letter Ruling 9801022,(36) the owner of a shopping center outsourced a significant number Of functions, but was still viewed as having active income.

Letter Ruling 9752045(37) involved three C corporations that owned, rented and managed shopping centers and residential real estate. They planned on merging into one corporation and electing S status. Because they had AE&P from their C status, they asked the IRS to rule on the character of their rental income. The IRS held that it was active income.

In Letter Ruling 9812019,(38) a C corporation with AE&P wanted to convert to S status, but first wanted to determine the character of its rental income. The rental was of restaurant equipment and facilities. The lessor maintained HVAC equipment, a parking lot, etc. The IRS held that it was not passive income, but did not rule on its status for Sec. 469 purposes. In Letter Ruling 9812026,(39) net leases were used (generally viewed as passive income); however, its snow removal activity, landscaping, building maintenance, etc., raised the level of rental activity to active income for Sec. 1362 purposes. Similarly, in other rulings,(40) the IRS ruled that the real estate rental activity was not passive in nature. In Letter Ruling 9824031,(41) the company had a site manager responsible for maintaining the facility. The company was a business trust under state law, but a corporation for Federal tax purposes; thus, it was treated as an S corporation.

Shareholder Eligibility

Over the last few years, one of the more popular entities of choice has been the LLC. Its interaction with S status has triggered several ruling requests. In Letter Rulings 9750004-7,(42) an LLC bought stock in an S corporation, not realizing that it was an ineligible shareholder that technically terminated S status. When the accountant made the company aware of its error, it distributed the S stock to its LLC members. The IRS granted Sec. 1362(f) relief, but required the LLC to include the separately and nonseparately reported income in its Form 1065, U.S. Partnership Return of Income, and related K-1s for the period the LLC owned the stock; the LLC members who received the distribution of S stock would include their pro rata items of S income for the post-distribution period. The LLC's distribution of the S stock would essentially be tax-free to both the entity and the owner, under Sec. 731(a) and (b).

Similarly, in Letter Ruling 9821013,(43) an S corporation was owned for a period of time by a partnership. When the company was informed that it was no longer eligible to be an S corporation, its shareholder rescinded the transfer. The IRS allowed Sec. 1362(f) relief, but required the partnership to include the S corporation's separately and nonseparately reported income in its Form 1065 and K-1s.

In Letter Ruling 9745017,(44) a QSST transferred S stock to a single-member LLC (SMLLC). Under Regs. Sec. 301.7701-300)(1), the LLC is disregarded for tax purposes; therefore, the IRS held that the QSST still held the stock of the S corporation and no termination event occurred. The use of an SMLLC may be an alternative to using a QSSS.

Letter Ruling 9745004(45) held that when an S corporation was the target in a Sec. 338(h)(10) acquisition, then immediately merged upstream into the acquirer, the momentary ownership of the S corporation by a corporate shareholder is disregarded under Rev. Rul. 72-320.(46)

In Letter Ruling 9801018,(47) spouses were divorcing; the husband transferred S stock to his spouse under Sec. 1041. The stock was to be held by her for the sole benefit of their child. Under state law, this transfer created a de facto trust (an ineligible S shareholder). The lawyers disagreed over who was the true owner for S purposes--the wife, the trust or the child. Multiple returns for the same year were filed; the ruling basically found that an invalid QSST existed. The IRS granted inadvertent termination relief under Sec. 1362(f).

Beginning in 1998, certain qualified charitable organizations and pension plans (but not individual retirement accounts) can be S shareholders. However, because S corporation active and portfolio income is treated as unrelated business taxable income and therefore is subject to taxation at the charity or pension level, its shareholder status may not be optimal vis-a-vis a partnership or LLC interest. Nonetheless, in Letter Ruling 9750041,(48) an S corporation one-bank holding company had a QSSS active subsidiary. A shareholder transferred QSSS stock to a charitable organization, unaware that it would end the holding company's S status. When the corporation became aware of the error, it redeemed the stock from the charity. The ruling held this to be an inadvertent termination under Sec. 1362(f) and required the charity to include its pro rata share of S income for the time it was a shareholder. The ruling did not make clear whether a charitable deduction was available to the donor.

Trusts

An S corporation and its tax professionals must carefully monitor its trust shareholders. During this past year, a variety of inadvertent termination rulings dealt with trust issues. For example, in Letter Ruling 9801029,(49) a living trust owned the stock of an S corporation. After the grantor-trustee died, the trust became irrevocable. More than two years later, the trust ceased to be an S shareholder under Sec. 1361(b)(1)(B). When the error was recognized, the stock was transferred to a voting trust in which each beneficiary would be counted as a shareholder. The IRS granted inadvertent termination relief.

Similarly, in Letter Ruling 9807003,(50) a husband set up a QSST for his wife that was invalid. When their tax adviser detected the error, they distributed the S stock to the wife-beneficiary. The wife included all the S income on her return. The IRS granted inadvertent termination relief under Sec. 1362(f). This ruling shares with the reader the trust powers and provisions permissible in a proper QSST.

When trusts are S shareholders, an issue that often arises is, "who is the owner of the underlying stock?" In Letter Ruling 9811028,(51) Sec. 676 deemed the trust grantor to be the owner for eligibility purposes. In contrast, a set of other rulings(52) held that when a series of 10 irrevocable trusts was established for the benefit of a grandchild, the beneficiary was deemed the trust owner and S shareholder, because her rights under the trust to withdraw assets and vest each corpus contribution to herself triggered Sec. 678(a). This ruling also held that the Crummey powers qualified transfers to the trust for the Sec. 2503 $10,000 annual exclusion.

Because QSSTs and ESBTs have several common elements, Rev. Proc. 98-23(53) offers guidance on how to convert a QSST into an ESBT automatically, and vice versa. (This can only be done once every 36 months.) The QSST or ESBT election must be filed with the Service Center and state at the top of the document, "ATTENTION ENTITY CONTROL--CONVERSION OF [A/AN QSST OR ESBT] TO [A/AN QSST OR ESBT] PURSUANT TO REV. PROC. 98-23." The effective date of the election cannot be more than two and one-half months before the election is filed or more than 12 months after the filing. The IRS has declined to rule on the conversion of a QSST to an ESBT, citing this procedure.(54)

Revocations and Terminations

Assuming that the revocation or termination of an S election is not deemed inadvertent, under Sec. 1362(g) a company must wait five years before it can re-elect S status. It will also be subject to Secs. 1374 and 1375 S-level taxes. Under Regs. Sec. 1.1362-5, the IRS issued rulings(55) that permitted re-election before five years. At the time the company in question terminated its election, three people each owned 25.5% of the company. At the time the company wanted to re-elect S status, a new shareholder owned 77% of the stock.

In A. W. Chesterton, Co., Inc.,(56) a C corporation incorporated in 1885 elected S status in 1985. One of the founders' grandchildren was an officer and director at the time of the election. In the early 1990s, because he was less than satisfied with the way the business was being run, but could not get the company to redeem him nor outside buyers to acquire his 27% interest in the company, he decided to sell his stock to two shell corporations he owned. The company sued for injunctive relief, arguing that the shareholder had a fiduciary responsibility not to end the S status nor greenmail the company. The district court and, ultimately, the First Circuit, agreed with the company. It is not clear whether all shareholders have this fiduciary duty (e.g., nonofficers and nondirectors), or only those involved in the original S election. In this case, given a shareholder dispute, the size of ownership and the long corporate history, it was not clear why a spinoff was not used to resolve the problem.

In another unusual situation, an S corporation asked the IRS to disapprove an S status revocation letter filed by a shareholder. The IRS ruled(57) that the revocation was not effective, but the facts were not clear as to how or why.

At the other end of the spectrum, in Letter Ruling 9750036,(58) a closely held company elected to revoke its S status by writing on the top of its final Form 1120S,"Final return as S corporation. Corporation elects to file as 1120 Corporation in [tax year]." There was no statement as to the fact that more than 50% of the shares so voted. The corporation then filed Form 1120 in later years. On the first Form 1120, the corporation wrote at the top of the first page, "Initial Form 1120 return. Previous returns fried on Form 1120S for an S corporation." The IRs allowed this. It ruled that, because the shareholders did not include corporate income in their returns in the Form 1120 years, they implicitly elected revocation. This company also completed a D reorganization without any formal plan.

Conclusion

Part I of this two-part article has examined S eligibility, elections and terminations. Part II, in the November 1998 issue, will analyze S operational issues.

(1) Rev. Proc. 97-48, IRB 1997-43, 19.

(2) Donald J. Peracchi, 9th Cir. 1998 (81 AFTR2d 98-1754, 1998-1 USTC [paragraph] 50,374), rev'g TC Memo 1996-191.

(3) See 1996 IRS Data Book (July 1997).

(4) IRS Letter Rulings 9731022 (5/1/97), 9744010 (7/31/97) and 9812023 (12/16/97).

(5) Id.

(6) IRS Letter Ruling 9748033 (8/29/97).

(7) IRS Letter Ruling 9751013 (9/16/97).

(8) IRS Letter Ruling 9752010 (9/19/97).

(9) Rev. Proc. 97-40, IRB 1997-33, 50.

(10) IRS Letter Ruling 9807022 (11/5/97).

(11) IRKS Letter Ruling 9745006 (8/4/97).

(12) See, e.g., IRS Letter Rulings 9735019, 9735020 and 9735026 (all dated 5/30/97), 9752020 (9/23/97), 9751011 (9/12/97) and 9751027 (9/19/97).

(13) IRS Letter Ruling 9735008 (5/23/97).

(14) See, e.g., IRS Letter Rulings 9824009 (3/9/98) and 9824046 (3/18/98).

(15) IRS Letter Ruling 9824012 (3/9/98).

(16) See, e.g., IRS Letter Rulings 9748011 (8/14/97) and 9807016 (11/13/97).

(17) IRS Letter Ruling 9745011 (8/7/97).

(18) IRS Letter Ruling 9803008 (10/14/97).

(19) IRS Letter Ruling 9803023 (10/20/97).

(20) IRS Letter Ruling 9817015 (1/20/98).

(21) IRS Letter Ruling 9821006 (2/5/98).

(22) IRS Letter Ruling 9814003 (12/17/97).

(23) Notice 97-4, IRB 1997-2, 24.

(24) REG-251698-96 (4/22/98); see Herskovitz, Lux and McLean, "QSSS Prop. Regs. Offer Planning Opportunities," p. 684, this issue.

(25) Rev. Rul. 67-274, 1967-2 CB 141.

(26) IRS Letter Ruling 9823016 (3/4/98).

(27) IRS Letter Ruling 9748024 (8/26/97).

(28) IRS Letter Ruling 9826009 (3/23/97).

(29) IRS Letter Ruling 9801015 (9/30/97).

(30) IRS Letter Ruling 9810018 (12/5/97).

(31) IRS Letter Ruling 9814009 (12/22/97).

(32) IRS Letter Ruling 9825028 (3/23/98).

(33) IRS Letter Ruling 9752058 (9/30/97).

(34) James L. Thurman, TC Memo 1998-233.

(35) IRS Letter Rulings 9811010 and 9811011 (both dated 12/1/97) and 9811015 (12/3/97).

(36) IRS Letter Ruling 9801022 (9/30/97).

(37) IRS Letter Ruling 9752045 (9/26/97).

(38) IRS Letter Ruling 9812019 (12/16/97).

(39) IRS Letter Ruling 9812026 (12/18/97).

(40) See, e.g., IRS Letter Rulings 9824018 (3/11/98) and 9824031 (3/13/98).

(41) Id.

(42) IRS Letter Rulings 9750004-7 (all dated 8/28/97).

(43) IRS Letter Ruling 9821013 (2/12/98).

(44) IRS Letter Ruling 9745017 (8/8/97).

(45) IRS Letter Ruling 9745004 (7/30/97).

(46) Rev. Rul. 72-320, 1972-I CB 270.

(47) IRS Letter Ruling 9801018 (9/30/97).

(48) IRS Letter Ruling 9750041 (9/12/97).

(49) IRS Letter Ruling 9801029 (9/30/97).

(50) IRS Letter Ruling 9807003 (9/30/97).

(51) IRS Letter Ruling 9811028 (12/9/97).

(52) IRS Letter Rulings 9812006, 9810006-8 and 9809004-8 (all dated 11/6/97).

(53) Rev. Proc. 98-23, IRB 1998-10, 30.

(54) See, e.g., IRS Letter Rulings 9823034-6 and 9824007-8 (all dated 3/9/98).

(55) IRS Letter Rulings 9825021 and 9825022 (both dated 3/20/98).

(56) A. W. Chesterton, Co., Inc. v. Arthur W. Chesterton, 128 F3d 1 (1st Cir. 1997)(80 AFTR2d 97-7280, 97-2 USTC [paragraph] 50,809).

(57) IRS Letter Ruling 9807007 (11/16/97).

(58) IRS Letter Ruling 9750036 (9/11/97).

RELATED ARTICLE: EXECUTIVE SUMMARY

* The SBJPA's amendment to Sec. 1361(b)(2) did not specify the filing requirements for electing QSSS status; thus, Notice 97-4 was issued to offer guidance.

* Citing Rev. Proc. 98-23, the IRS has declined to rule on the conversion of a QSST to an ESBT.

* Rev. Procs. 97-40 and 97-48 allow late S elections without the need for a letter ruling or user fee.

For more information about this article, contact Dr. Karlinsky at [phone].

Editor's note: Dr. Karlinsky is a member of the AICPA Tax Division's Corporations & Shareholders Taxation Committee.