Trust's failure to qualify as QSST caused inadvertent termination of S status.

• Author: Arthur, Charles C.
• Position: Qualified subchapter S trust

In Rev. Rul. 93-31, the Service recently ruled that a separate and independent share of a trust could not qualify as a qualified subchapter S trust (QSST) if there was a remote chance that the corpus of the trust share would be distributed during the current income beneficiary's lifetime to someone else. The transfer of an S corporation's stock to a trust that was not a QSST terminated the corporation's S status.

QSSTs

Sec. 1361(b)(1)(B) states that an S corporation cannot have as a shareholder a trust that is not described in Sec. 1361(c)(2). However, under Sec. 1361(d)(2), a beneficiary of a trust that meets certain requirements may elect to treat a trust not otherwise described in Sec. 1361(c)(2) as though it were a QSST. For a trust to qualify as a QSST, the trust instrument must require afl of the following:

* At all times during the life of the current income beneficiary there must be only one income beneficiary (who is a U.S. citizen or resident).

* Any corpus distributed during the life of the current income beneficiary may be distributed only to such beneficiary.

* The current income beneficiary's income interest in the trust must terminate on the earlier of that beneficiary's death or termination of the trust.

* On the termination of the trust during the current income beneficiary's life, the trust must distribute all of its assets to that beneficiary.

Sec. 1361(d)(3) also provides that a substantially separate and independent share of a trust within the meaning of Sec. 663(c) shall be treated as a separate trust for purposes of Sec. 1361(c) and (d).

Rev. Rul. 93-31

In the ruling, an individual transferred S stock to a trust. The trust instrument provided that income was payable in equal shares to two individuals. On the death of either beneficiary, one-half of the remaining corpus was to be distributed to whomever that beneficiary had appointed (or to that beneficiary's estate in the absence of such an appointment). In addition, the trust authorized the trustee to distribute all or a portion of the corpus to one of the two named beneficiaries. for that beneficiary's health, education, support or maintenance. This beneficiary had other income that was so substantial that the possibility that this power would be exercised was remote.

Sec. 663(c) provides that if a single trust has more than one beneficiary, substantially separate and independent shares for different beneficiaries are treated as separate trusts for determining the...