QSSTs.

• Author: Laffie, Lesli S.
• Position: Qualified subchapter S trust elections; community property

A new proposed regulation provides guidance on qualified subchapter S trust (QSST) elections for testamentary trusts under Sec. 1361. The proposal incorporates changes made to Sec. 1361 by the Small Business Job Protection Act of 1996 (SBJPA) to provide that a testamentary trust could be a permitted S shareholder for two years. Also, a former qualified subpart E trust would be a permitted shareholder for two years, whether or not the entire corpus was included in the deemed owner's gross estate.

The proposed regulation would eliminate the special rules for determining whether trusts consisting of community property qualify for the two-year period. Prior to the law change, testamentary trusts and former qualified subpart E trusts could be shareholders for only 60 days.

Additionally, the proposal refers to electing small business trusts (ESBTs), which were added by the SBJPA, and provides that certain former qualified subpart E trusts and testamentary trusts could continue as S shareholders after the end of the two-year period by becoming ESBTs. Further, the regulation reflects law changes (1) allowing certain exempt organizations to be S shareholders for post-1997 tax years and (2) increasing the number of permissible S shareholders from 35 to...