REVENUE RULE 92-20

1992-1 C.B. 301, 1992-13 I.R.B. 18.

Internal Revenue Service
Revenue Ruling

TRUSTS; QUALIFIED SUBCHAPTER S TRUSTS

Published: March 30, 1992

Section 1361. S Corporation Defined

Trusts; qualified subchapter S trusts. A provision in a trust agreement that authorizes the trustee to accumulate trust income in the event that the trust does not hold any shares of an S corporation does not preclude the trust's qualification as a 'qualified subchapter S trust'(QSST).

ISSUE

Does a provision in a trust agreement that authorizes the trustee to accumulate trust income in the event that the trust does not hold any shares of an S corporation preclude the trust's qualification as a "qualified subchapter S trust" (QSST)?

FACTS

X is a small business corporation that made a valid election for its 1988 taxable year to be an S corporation. In 1989, A transferred shares of X to a trust, T. B is the income beneficiary of T. The terms of the trust instrument satisfy the requirements of section 1361(d)(3)(A) of the Code for QSSTs.

The trust instrument provides that all the trust income (within the meaning of section 643(b) of the Code) is to be distributed to B, a United States citizen, on at least an annual basis. However, if T no longer holds any shares of X, the trust instrument permits the trustee to distribute trust income or to accumulate trust income and add it to the corpus of the trust. In that case any undistributed income of the trust at the time of B's death is to be paid to B's estate.

LAW AND ANALYSIS

Section 1361(a)(1) of the Code defines the term "S corporation" as a small business corporation for which an election under section 1362(a) is in effect for the taxable year. Section 1361(b)(1)(B) permits only individuals, estates, and certain trusts to be shareholders of a small business corporation. A QSST, defined in section 1361(d)(3), is one type of trust permitted to be a shareholder under section 1361(b)(1)(B).

Section 1361(d)(3)(A) of the Code provides that the terms of the trust must meet each of the four requirements of section 1361(d)(3)(A) in order for the trust to be a QSST. Thus a trust is not a QSST if its terms fail to meet any one of the four requirements of section 1361(d)(3)(A). For example, if the trust terms provide that in the event the trust does not hold shares of an S corporation the trust may terminate during the life of the current income beneficiary and distribute its corpus to persons other than the current income beneficiary, the trust is not a QSST because it does not meet the requirement of section 1361(d)(3)(A)(iv) of the Code (relating to trust provisions with respect to corpus distributions). See Rev. Rul. 89-55, 1989-1 C.B. 268.

Section 1361(d)(3)(B) of the Code provides that a trust is a QSST if all of the income of the trust (within the meaning of section 643(b)) is distributed (or required to be distributed) currently to one individual who is a citizen or resident of the United States. It does not mandate that the current distribution of income necessarily be prescribed by the terms of the trust. Therefore, a trust may be a QSST even if the terms of the trust do not require that the trust income be distributed currently throughout the term of the trust, so long as the trust income is actually so distributed.

The legislative history supports this conclusion. As originally enacted by section 234 of the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 1981-2 C.B. 256, 298, the QSST requirements provided that the only means of satisfying the current income distribution requirement was for the trust actually to distribute all of its income currently to the beneficiary. The Subchapter S Revision Act of 1982,, Pub. L. 97-354, 1982-2 C.B. 702,704, amended the current income distribution requirement of section 1361(d)(3)(B) of the Code by adding "(or required to be distributed)." This statutory change did not affect trusts that meet the actual distribution test of the original statute; rather, it enlarged the QSST definition. Thus, the parenthetical reference in the current statute to a requirement to distribute does not limit qualification by actual distribution.

Accordingly, it is clear from the language and legislative history of section 1361(d)(3)(B) of the Code that T is not precluded from being a QSST merely because the terms of the trust permit accumulation of income when the trust no longer holds stock of an S corporation.

HOLDING

A provision in a trust agreement that authorizes the trustee to accumulate trust income in the event that the trust does not hold any shares of an S corporation does not, by itself, preclude the trust's qualification as a QSST.

DRAFTING INFORMATION

The principal author of this revenue ruling is David Edquist of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Mr. Edquist on (202) 343- 8459 (not a toll-free call).

Rev. Rul. 92-20, 1992-1 C.B. 301, 1992-13 I.R.B. 18.