By Ditman, Scott
The CPA Journal , Vol. 64, No. 4
In Rev. Rul. 24, 1932-2 CB 216, the IRS held that if a qualified Subchapter S trust (QSST) sells all or part of its S corporation stock, the beneficiary of the QSST, rather than the trust, recognizes the gain or loss on the sale of the stock. This conclusion was reached even though under local law, any gain or loss on the sale was allocable to corpus rather than to income.
TR is a trust that meets all the requirements of a QSST under IRC Sec. 1361(d)(3). TR owns shares of M corporation stock.
M corporation is a small business corporation that has elected to be an S corporation. A, the sole income beneficiary of TR, has made an election under IRC Sec. 1361(d)(2) regarding TR and M.
TR sells all or part of its M corporation stock. Under applicable local law, gain or loss on the sale of the stock is properly allocable to corpus rather than to income.
Under IRC Sec. 1361(c)(2)(A)(i), a trust that is treated as owed by an individual who is a citizen or resident of the U.S. under the grantor trust rules is a permissible S corporation shareholder [IRC Sec. 1361(d)(I)(A).]
Under IRC Sec. 1361(d)(1)(B), for purposes of IRC Sec. 67a) (which section discusses the rules for when a person other than the grantor will be treated as the owner of a portion of a trust), the beneficiary of a QSST will be treated as the owner of the portion of the trust consisting of stock in an S corporation for which the IRC Sec. 1361(d)(2) election is made. IRC Sec. 671 provides that when a grantor or another person is treated as the owner of any portion of a trust, the taxable income and credits of that person will include the income, deductions, and credits of the trust attributable to that portion of the trust. Therefore, IRC Sec. 671 applies to the stock of an S corporation where the beneficiary has made the QSST election under IRC Sec. …