REVENUE RULE 92-73

1992-2 C.B. 224, 1992-37 I.R.B. 7.

Internal Revenue Service
Revenue Ruling

INDIVIDUAL RETIREMENT ACCOUNT HOLDING S CORPORATION STOCK

Published: September 14, 1992

Section 1361. S Corporation Defined, 26 CFR 18.1361 -1: Election to treat qualified subchapter S trust as a trust described in section 1361(c)(2)(A)(i).

(See Also Sections 72, 408; 1.72-1, 1.408-2.)

Individual retirement account holding S corporation stock. A trust that qualifies as an individual retirement account under section 408(a) of the Code is not a permitted shareholder of an S corporation under section 1361.

ISSUE

Is a trust that qualifies as an individual retirement account under section 408(a) of the Internal Revenue Code a permitted shareholder of an S corporation under section 1361?

LAW

Section 1361(a)(1) of the Code defines an "S corporation" as a small business corporation for which an election under section 1362(a) is in effect.

Section 1361(b)(1) of the Code defines a "small business corporation" as a domestic corporation that is not an ineligible corporation and that does not (A) have more than 35 shareholders, (B) have as a shareholder a person (other than an estate and other than a trust described in section 1361(c)(2)) who is not an individual, (C) have a nonresident alien as a shareholder, or (D) have more than one class of stock.

Section 1361(c)(2)(A)(i) of the Code provides that a trust may be a shareholder of an S corporation if the entire trust is treated under subpart E of part I of subchapter J of chapter 1 of the Code as owned by an individual who is a citizen or resident of the United States. When any portion of a trust is treated as owned by an individual under subpart E of part I of subchapter J of chapter 1 of the Code, section 671 provides that there will be included in computing the taxable income and credits of the owner those items of income, deductions, and credits of the trust that are attributable to that portion of the trust, to the extent that such items would be taken into account in computing taxable income or credits of an individual.

Section 1361(d)(I) of the Code provides that if a beneficiary of a "qualified subchapter S trust" (QSST) so elects, the trust will be treated as a trust described in section 1361(c)(2)(A)(i) and thus will be a permitted shareholder of an S corporation. If the election is made by a beneficiary of a QSST, section 1361(d)(1)(B) provides that, for purposes of section 678(a), the beneficiary will be treated as the owner of that portion of the QSST that consists of stock in the S corporation. If the beneficiary of a QSST is treated for purposes of section 678(a) as the owner of that portion of the QSST that consists of stock in the S corporation, the income, deductions, and credits of the S corporation that are allocated to the QSST are included in computing the beneficiary's taxable income and credits, in accordance with section 671.

Section 1361(d)(3) of the Code provides that a QSST is a trust the terms of which require that (i) during the life of the current income beneficiary, there shall be only one income beneficiary of the trust; (ii) any corpus distributed during the life of the current income beneficiary may be distributed only to the beneficiary; (iii) the income interest of the current income beneficiary in the trust shall terminate on the earlier of the beneficiary's death or the termination of the trust; and (iv) upon the termination of the trust during the life of the current income beneficiary, the trust shall distribute all of its assets to the beneficiary. In addition, for a trust to be a QSST, all of the income of the trust must be distributed (or required to be distributed) currently to one individual who is a citizen or resident of the United States.

Section 408(a) of the Code provides that the term "individual retirement account" means a trust created or organized in the United States for the exclusive benefit of an individual or the individual's beneficiaries, but only if the written governing instrument creating the trust meets the requirements specified in section 408(a).

Section 408(d)(I) of the Code provides, generally, that any amount paid or distributed out of an individual retirement account will be included in the gross income of the payee or distributee, as the case may be, in the manner provided under section 72 (relating to the taxation of annuities).

ANALYSIS

A trust is permitted to be a shareholder of an S corporation only if the trust is described in section 1361(c)(2)(A)(i) of the Code or is a QSST that is treated as a trust described in section 1361(c)(2)(A)(i) because the beneficiary has so elected under section 1361(d). In either case, under subpart E of part I of subchapter J, the beneficiary of the trust is taxed currently on the trust's share of S corporation income, deductions, and credits. By contrast, under section 408(d) of the Code, the beneficiary of a section 408(a) trust is taxed when distributions are made from the trust and is taxed in the manner provided under section 72. A section 408(a) trust cannot also be a trust described in section 1361(c)(2)(A)(i) or a QSST treated as a trust described in section 1361(c)(2)(A)(i) because the rules that apply to a trust described in section 1361(c)(2)(A)(i) or QSST treated as such a trust are incompatible with the rules that apply to a section 408(a) trust. Therefore, a section 408(a) trust cannot satisfy the rules applicable to a trust that is a permitted shareholder of an S corporation.

HOLDING

A trust that qualifies as an individual retirement account under section 408(a) of the Code is not a permitted shareholder of an S corporation under section 1361.

If a shareholder inadvertently causes a termination of an S corporation by transferring stock to a trust that qualifies as an individual retirement account under section 408(a) of the Code, relief may be requested under section 1362(f) and the regulations thereunder.

DRAFTING INFORMATION

The principal author of this revenue ruling is Daniel M. McCabe of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Mr. McCabe on (202) 622-3495 (not a toll-free call).

Rev. Rul. 92-73, 1992-2 C.B. 224, 1992-37 I.R.B. 7.