Final Regulations Render Rev. Rul. 92-84 Obsolete

Article excerpt

Rev. Rul. 92-84, 1992-2 C.D. 216, holds that if a Qualified Subchapter 8 Trust (QSST) sells its stock, the current income beneficiary and not the trust must recognize any gain or loss. On July 20, 1996, the IRS issued final regulations (T.D. 8600) on the definition of an S corporation under IRC Sec. 1361. As a result of the newly issued regulations, Rev. Rul. 92-84 has been rendered obsolete.

Under the final regulations, the current income beneficiary of a QSST will not be treated as the owner of the S corporation stock in determining and attributing the Federal income tax consequences of a disposition of the stock by the QSST. Instead, any consideration received for such dispositions will be treated as received by the trust in its status as a separate taxpayer under IRC Sec. 641.

Background

Only certain types of trusts are eligible to hold S corporation stock for a period longer than 60 days. Generally, a trust that is treated as owned by an individual who is a citizen or resident of the U.S. under the grantor trust provisions of IRC (Secs. 671679 of Subpart E trusts) may qualify as a permitted S corporation shareholder.

A QSST will be a permitted a shareholder if the current income beneficiary makes an election, and if the trust satisfies certain requirements. Generally, the requirements will be satisfied if under the terms of the trust 1) there can be only one income beneficiary of the trust during the current income beneficiary's lifetime; 2) corpus distributed during the lifetime of the current income beneficiary may be distributed only to such beneficiary; 3) the income interest of the current income beneficiary terminates on the earlier of the beneficiary's death or the trust's termination; 4) upon the termination of the trust during the life of the current income beneficiary the trust shall distribute all of its assets to such beneficiary; and 6) all of the income of the trust is, or is required to be distributed currently to the income beneficiary who is a citizen or resident of the U.S.

Under IRC Sec. 678, a person other than the grantor of a trust can be treated as the owner of the trust for tax purposes. In the case of a QSST with respect to which an income beneficiary makes an election, IRC Sec. 1361(d) provides that the income beneficiary of the trust, will be treated as the owner (for purposes of IRC Sec. 678) of that portion of the trust which consists of stock in an S corporation.

Rev. Rul 92-84 Phantom Incomes And Possible Disposition Under 489B Rev. Rul. 92-84, 1992-2 C.B. 216 holds that if a QSST sells its S corporation stock, the current income beneficiary and not the trust must recognize any gain or loss. As a result, the current income beneficiary was required to pay tax on gain, which under local law would generally be considered corpus of the trust. …