QSST reformation not retroactive for tax purposes.

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

In Rev. Rul. 93-79, the IRS ruled that a state court order reforming a trust so that it would satisfy the requirements of a qualified subchapter S trust (QSST) was not recognized for Federal tax purposes in determining the trust's eligibility as an S shareholder. This ruling points out the need to review trust documents to assure they are in compliance with the QSST provisions of Sec. 1361(d). To the extent they are not in compliance, legal counsel should be asked to reform the trust documents before filing an S election. If an invalid election is already in place, amended returns should be filed, and a new election should be filed immediately.

QSSTs generally

Sec. 1361(b)(1)(B) states that an S corporation may have a trust as a shareholder only if the trust is described in Sec. 1361(c)(2). 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 qualified S shareholder. For a trust to qualify as a QSST, the trust instrument must meet all of the following criteria.

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

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

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

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

Rev. Rul. 93-79

On Mar. 15, 1992, a corporation filed an election to be treated as an S corporation for its tax year beginning Jan. 1, 1992. A trust was one of the shareholders participating in the S election. The trust document provided that under certain circumstances, a portion of the trust corpus could be distributed to a person other than the current income beneficiary. Thus, the trust terms did not satisfy the corpus distribution requirement of Sec. 1361(d)(3)(A)(ii).

Sec. 1362(b)(1) requires that the electing corporation satisfy the S eligibility requirements when the election is filed. Sec. 1362(b)(2) provides that if an election is made on or before the fifteenth day of the third month of the tax year, but on one or more days during that year, and before the election was made, the corporation...