Sale of S stock by QSST.

• Author: Conley, James B.
• Position: Qualified subchapter S trust - Brief Article

In Rev. Rul. 92-84, the Service concluded that gain from the sale of S stock held by a qualified subchapter S trust (QSST) was taxable to the current income beneficiary (CIB), even though the entire proceeds from the sale of the S stock (including the capital gain) were added to the trust corpus and payable to the remainder party on termination of the trust, rather than to the CIB. The CIB was required to report the gain on his individual income tax return and pay the resulting capital gain tax.

Unless the QSST makes provision for discretionary distributions of principal to the CIB, the trustee should seek judicial reformation of the governing instrument in order to permit reimbursement by the trust to the CIB of the capital gain tax paid by the CIB.

A further complication could be posed by Rev. Rul. 77-402, which held that conversion of a subpart E (grantor) trust to a regular trust, on the lapse or surrender of the trust donor's subpart E power, was a taxable disposition of an installment obligation held by the former grantor trust. In most cases, the deferred installment gain is "triggered" by disposition of the obligation.

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