Page 133 - TaxAdviser_2022

ESTATES, TRUSTS & GIFTS

be due within 2½ months of that shareholder disposes of the stock. This
Shareholders should transfer.19 Alternatively, if the shares can create a potential trap that suc-
cessor shareholders should consider.
are retained for the maximum dura-
be wary of this tion of the Sec. 645 period, an election Consider what would happen if, at a
trap and try to time might not be due for more than four later date, there is a sale of substantially
years.20 The point to recognize is that
all of the S corporation’s assets but the
liquidations so they any time a shareholder dies, the parties shareholder does not liquidate her in-
occur in the same should pay immediate attention to the terest in that same year.
For example, consider an S corpora-
tax year that the plan with respect to the shares and the tion whose inside net basis is $1 million
potential need for, and timing of, any
gain from the sale is required election. that is owned by shareholders whose
In some cases, Rev. Proc. 2013-30
reported. will provide automatic relief for tax- outside basis is $5 million (due perhaps
to a basis step-up on a prior share-
payers to make late elections in these holder’s death). If the S corporation
types of scenarios. But the window sells its assets, $4 million of gain will
are doing. The corporation will gener- for relief under this revenue procedure be triggered. This gain passes through
ally have no visibility into its share- closes three years and 75 days after the to the shareholders and increases stock
holders’ estate plans, who will get shares election’s intended effective date. The basis. If the shareholders fail to liq-
upon death, and whether the parties are latest intended effective date for an ir- uidate their interests in that same tax
making timely elections. In some cases, revocable grantor trust is two years after year, the basis step-up will not shield
the corporation might even be unaware the death of a grantor, thus possibly the $4 million of gain. Instead, the loss
that a shareholder has died. This means providing additional time to make the that will likely occur upon liquidation
that a corporation’s S election can ter- S election. Unfortunately, these types would be deferred, possibly to a year
minate before the corporation is even of oversights often are not discovered where the shareholders might have no
aware of the event that triggered the until many years later, which can trigger offsetting gains. This will trap the loss
termination.18 the need to seek relief via a private let- and defer the related tax benefit until
Consider a common scenario. As- ter ruling. the shareholders can trigger other gains
sume a decedent held S corporation Failing to make a required S election (assuming that is possible). Sharehold-
shares in a revocable trust during life. has the potential to be very costly to ers should be wary of this trap and try
Upon death the trust becomes an ir- the parties involved. Therefore, staying to time liquidations so they occur in the
revocable trust, with its own income on top of the timing of these elections same tax year that the gain from the
tax filing requirement. During the first is paramount. sale is reported.
tax year, assume the executor/trustee
makes a timely Sec. 645 election to S corporation gain on sale of Buy-sell agreement and
treat the trust as part of the estate. This assets and step-up in basis of importance of life insurance
election allows the executor/trustee to shareholder’s shares A buy-sell agreement is an agreement
file one income tax return reporting the Unlike a partnership, which can take between an S corporation’s sharehold-
activity of the estate and the qualified advantage of a Sec. 754 election to help ers and the corporation that specifies
revocable trust. a successor partner equalize her inside the terms upon which shares will pass
Does this trust need to make an and outside basis, an S corporation has upon certain events, such as death. A
election? If so, when does it need to no similar option. When a shareholder buy-sell agreement is critical because
do so? dies, the shares’ basis is stepped up to it can help provide assurance as to
The answer, of course, is — it de- fair market value (FMV).21 But there how shares will pass from a deceased
pends. It depends on what happens will be no adjustment to the inside shareholder and thereby prevent trans-
with those shares and when it happens. basis of the S corporation’s assets. fers that might otherwise trigger an
If the shares are transferred to another As a consequence, the benefit of inadvertent termination of an S corpo-
trust immediately, an election might the step-up may be deferred until the ration’s tax status.

18. Sec. 1362(d)(2) and Regs. Sec. 1.1362-4(b). 20. Regs. Sec. 1.1361-1(h)(1)(iv).
19. Sec. 1361(e)(3) and Regs. Secs. 1.1361-1(j)(6) and 1.1361-1(m)(2). 21. Sec. 1014(a)(1).

24 March 2022 The Tax Adviser