Liquidation gain allocable to QSST shares.

• Jurisdiction: United States
• Date: 01 April 1999
• Author: Orr, Chuck

Sec. 1361(d) (1) (B) and Regs. Sec. 1.1361-1(j)(7)(i) provide that a beneficiary of a qualified subchapter S trust (QSST) is treated as the owner of that portion of the trust that consists of S stock. Generally, this means that all S income (including gains and losses on the sale of assets) attributable to shares held by a QSST is taxed to the QSST's income beneficiary. However, under Regs. Sec. 1.1361-1(j)(8), the income beneficiary is not treated as the owner of S stock "in determining and attributing the federal income tax consequences of a disposition of the stock by the QSST." In other words, gain or loss on a sale of S stock by a QSST is taxed to the QSST, not to the income beneficiary. This regulation was adopted in 1995 to change the result of Rev. Rul. 92-84, which held that the income beneficiary must recognize the gain on the sale of S stock held by a QSST even if the sales proceeds were allocable to corpus and not to income.

The invalidation of Rev. Rul. 92-84 occurred largely as a result of practitioners' concern about the sale of stock by a QSST in an installment sale when, under state law, the gain on the stock sale was allocable to the trust corpus. If the income beneficiary were...