Cracking the
Income Tax Code
for LLCs and
Trusts
Presented by James J. Flick
Flick Law Group, P.L.
Flick Law Group, P.L.
3700 South Conway Road, Suite 100
Orlando, Florida 32812
Practice areas limited to:
Estate Planning
Business Planning
Asset Protection Planning
Probate and Guardianship
2
Introduction
In recent years, the use of complex trusts and limited
liability company structures for estate tax and asset
protection planning has increased dramatically.
Tax accountants are responsible for assisting clients
with the annual accounting and tax reporting for
these structures.
This presentation will cover the proper income tax
reporting for grantor trusts and LLCs.
3
Reporting Options for Grantor
Trusts
• Introduction to Grantor Trusts.
The grantor trust rules were originally enacted to restrict
the ability of wealthy taxpayers to reduce their income
tax by creating multiple trusts treated as separate
taxpayers.
Modern estate planners generally use an intentional
grantor trust to increase the amount of wealth that can
be transferred to future generations than is possible
when using non-grantor trusts.
4
Reporting Options for Grantor
Trusts
• History of Grantor Trusts.
– The objective of the development of grantor trust
rules was to prevent assignment of income to a
taxpayer (a trust) in a lower income tax bracket.
• Historical rates were at one time as high as 91%.
• Prior to 1949 joint income tax returns by spouses did
not exist.
• All trusts were generally treated as separate taxpayers
subject to progressive income tax rate brackets similar
to individuals.
5
Reporting Options for Grantor
Trusts
• Development of income tax status of trusts.
– Beginning in 1924, trust income was reported by
the grantor if grantor had a right to receive trust
income or a power to revest trust assets even if
the grantor did not receive any income or did not
exercise the power.
– Taxation of the grantor expanded by case law if
trust income could be used to satisfy the grantor's
obligations or to benefit the grantor.
6
Reporting Options for Grantor
Trusts
– Taxation to the grantor expanded if grantor
retained such control over trust income or assets
that resembled ownership attributes (Supreme
Court in Helvering v. Clifford in 1940).
– The IRS adopted the Clifford doctrine in the
Clifford Regulations in 1939.
– The 1954 Code codified the Clifford Regulations.
– Minor Code amendments in 1969 and 1976.
7
Reporting Options for Grantor
Trusts
– The 1986 Tax reform Act dramatically compressed
the graduated income tax rates applicable to
trusts.
– Minor Code amendments in 1988 and 1990.
– In 1996, all foreign trusts automatically treated as
grantor trusts (enactment of IRC section 679).
8
Reporting Options for Grantor
Trusts
• Expansion of the Use of Grantor Trusts for Estate
Planning.
– Rev. Rul. 85-13, the existence of a wholly-owned grantor
trust is ignored for income tax purposes (a sale of trust
assets to the grantor disregarded for income tax purposes).
– Under the "check the box" regulations a grantor trust is
not a "disregarded entity". It can be a separate taxpayer
for gift and estate taxes.
– Rev. Rul. 2004-64. The grantor's payment of the income
taxes on the grantor trust's income is not a gift.
9
Reporting Options for Grantor
Trusts
• Explanation of Grantor Trusts
For tax purposes, a grantor trust is a trust in which the
grantor or another person is treated as the owner of any
portion of a trust because such person retains or holds
certain specified powers with respect to the trust.
Depending upon the power retained or held, the trust can
be classified differently for income, gift and estate tax
purposes or it can a grantor trust for all tax purposes.
10
Reporting Options for Grantor
Trusts
There are two types of grantor trusts: a grantorcontrolled trust and a beneficiary-controlled trust.
A grantor-controlled trust exists when the grantor is
treated as the owner of the entire trust for tax purposes.
A beneficiary-controlled trust exists when a person other
than the grantor is treated as the owner of the entire
trust for tax purposes.
11
Reporting Options for Grantor
Trusts
– Grantor-Controlled Trust
In general, the grantor is deemed to be the owner of the
trust if the grantor retains (or if a non-adverse party holds):
•
•
•
•
•
a reversionary interest;
control over the enjoyment of the corpus and income of the trust;
certain administrative powers;
a power to revoke the trust; or
a power to use or accumulate funds for the grantor's benefit or
the benefit of a spouse, or to pay premiums on insurance policies
on the grantor's life or on the life of his or her spouse.
12
Reporting Options for Grantor
Trusts
– Beneficiary-Controlled Trust
A trust beneficiary is treated as the owner of the trust only if
the grantor is not taxed as the deemed owner, and:
• the beneficiary has a power exercisable solely by himself to
vest corpus and income therefrom to himself; or
• the beneficiary has previously partially released or otherwise
modified such a power and afterwards retains controls over
the trust that would cause him to be treated as the owner of
the trust under the rules applying to grantors.
13
Reporting Options for Grantor
Trusts
• Federal Income Tax Reporting for Grantor Trusts
The federal income tax reporting requirements for grantor
trusts are set forth in Income Tax Regs. §1.671-4.
There are two sets of acceptable reporting methods.
One for trusts all of which are treated as owned by one
grantor or by one other person, and another for trusts all of
which are treated as owned by two or more grantors or other
persons.
14
Reporting Options for Grantor
Trusts
• A trust all of which is treated as owned by one grantor or by one other
person.
Federal income tax reporting for the trust must be undertaken using one of
the three options described below.
The Form 1041 Filing Method is the default reporting method. It is used by persons
who wish to emphasize the separate existence of the trust and encourage better trust
accounting and record keeping.
Optional Filing Method 1 is the simplest, and most commonly used, method for these
types of trusts. This is the traditional method used for revocable living trusts.
Optional Filing Method 2 is rarely used.
15
Reporting Options for Grantor
Trusts
• Form 1041 Filing Method.
Complete the entity portion of Form 1041 (U.S. Income Tax Return for Estates
and Trusts).
Do not show any dollar amounts on the Form 1041 or use Schedule K-l.
Prepare an attachment to Form 1041 showing the grantor's name, SSN, and
address, and items of income, deductions and credits taxable to the grantor
(i.e., all income, deductions and credits of the trust).
File the Form 1041 along with the attachment and provide a copy of the Form
1041 and attachment to the grantor.
16
Reporting Options for Grantor
Trusts
• Optional Filing Method 1.
The grantor must provide the trustee with his or her SSN on Form W-9,
Request for Taxpayer Identification Number and Certification.
The trustee must provide all payers of income with the grantor's name and
SSN, and the address of the trust.
The trustee must provide the grantor with a statement that (i) shows all items
of income, deductions and credits of the trust, (ii) identifies the payer of each
item of income; (iii) explains how the grantor takes those items into account
when figuring his or her taxable income or tax; and (iv) informs the grantor
that those items must be included when figuring taxable income and credits
on his or her income tax return.
17
Reporting Options for Grantor
Trusts
• Optional Filing Method 2.
The trustee must obtain a taxpayer ID number for the trust.
The trustee must provide all payers of income with the trust's
taxpayer ID number and address.
The trustee must file with the IRS the appropriate Forms 1099 to
report the income or gross proceeds paid to the trust during the
tax year that shows the trust as the payer and the grantor as the
payee. The trustee must report each type of income in the
aggregate and each item of gross proceeds separately.
18
Reporting Options for Grantor
Trusts
The trustee must provide the grantor with a statement that (i)
shows all items of income, deductions and credits of the trust,
(ii) identifies the payer of each item of income; (iii) explains how
the grantor takes those items into account when figuring his or
her taxable income or tax; and (iv) informs the grantor that those
items must be included when figuring taxable income and credits
on his or her income tax return.
19
Reporting Options for Grantor
Trusts
• A trust all of which is treated as owned by two or
more grantors or other persons.
The trustee must furnish the name, TIN, and address of
the trust to all payors for the taxable year, and comply
with certain the additional requirements.
20
Reporting Options for Grantor
Trusts
The additional obligations of the trustee include:
• Obligation to file Forms 1099. The trustee must file with the
Internal Revenue Service the appropriate Forms 1099,
reporting the items of income received by the trust during
the taxable year that are attributable to the portion of the
trust treated as owned by each grantor or other person, and
showing the trust as the payor and each grantor or other
person treated as an owner of the trust as the payee.
The trustee must report each type of income in the
aggregate, and each item of gross proceeds separately.
21
Reporting Options for Grantor
Trusts
• Obligation to furnish statement. The trustee must also
furnish to each grantor or other person treated as an
owner of the trust a statement that:
• Shows all items of income, deduction, and credit of the
trust for the taxable year attributable to the portion of
the trust treated as owned by the grantor or other
person;
• Provides the grantor or other person with the
information necessary to take the items into account in
computing the grantor's or other person's taxable
income; and
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Reporting Options for Grantor
Trusts
• Informs the grantor or other person that the items
shown on the statement must be included in
computing the taxable income and credits of the
grantor or other person on their income tax return.
• Information contained in the Forms 1099 filed by the
trustee does not have to be duplicated in the
statement furnished to each grantor or other person.
23
Entity Classification Rules for
LLCs
• In General
Effective January 1, 1997, the IRS issued rules for
determining whether an entity is classified as a passthrough entity or a corporation.
These rules, referred to as the “check-the-box”
regulations, changed the guidelines for classifying
organizations for federal tax purposes in a manner
intended to simplify the classification process.
24
Entity Classification Rules for
LLCs
The regulations eliminated the analysis of corporate
characteristics (i.e., limited liability, continuity of life,
centralized management, and free transferability of
interests) possessed by the entity.
The regulations provide default rules for entities that do
not elect a particular classification.
25
Entity Classification Rules for
LLCs
• New LLC May Generally Elect Classification
Under the regulations, an LLC formed on or after January 1,
1997, and which qualifies as an “eligible entity,” may generally
elect its entity classification for federal tax purposes.
An LLC is considered an “eligible entity” if it is a business
entity that is not classified under a specific Code provision, is
not considered a trust, and is not automatically classified as a
corporation as a matter of law.
26
Entity Classification Rules for
LLCs
An eligible LLC with two or more members may elect to
be classified as either an association (i.e., a corporation)
or a partnership.
An eligible LLC having a single member may elect to be
classified as an association or to be disregarded as an
entity separate from its owner.
27
Entity Classification Rules for
LLCs
• Default Classification of LLCs if No Election is Made
If an eligible entity fails to make a proper election, a set
of default classification rules apply.
An entity is defined as a “domestic entity” if it is created
or organized in the United States under the laws of the
United States or a particular state. An entity is foreign if it
is not domestic.
28
Entity Classification Rules for
LLCs
– Domestic LLCs
Under the default rules, a domestic eligible entity is:
• taxed as a partnership if it has two or more
members; or
• disregarded as an entity separate from its
owner if it has a single owner.
29
Entity Classification Rules for
LLCs
– Foreign LLCs
Under the default rules, a domestic eligible entity is:
• taxed as a partnership if it has two or more
members and at least one member does not
have limited liability; or
• taxed as a corporation if all members have
limited liability; or
• disregarded as an entity separate from its
owner if it has a single owner.
30
Entity Classification Rules for
LLCs
• When Is an Election Necessary?
An eligible LLC needs to elect classification in only two
circumstances:
– It chooses to be initially classified differently from
its default classification.
– It desires to change its classification.
Taxpayers may wish to make a “protective”
classification election in order to have some record of
the LLC's classification.
31
Entity Classification Rules for
LLCs
• How Is the Election Made?
An eligible LLC must file Form 8832, Entity Classification
Election, with the IRS Service Center designated on
Form 8832.
A copy of Form 8832 must be attached to the federal
tax or information return for the taxable year for which
an election is made.
32
Entity Classification Rules for
LLCs
• How Is the Election Made?
Relief is available for untimely filed elections. However, the
IRS has the authority to accept or deny the late filing.
An election must be signed by either (i) each member of the
electing LLC who is an owner at the time the election is
filed, or (ii) any officer, manager, or member of the electing
LLC who is authorized under local law or the LLC's
organizational documents to make the election.
33
Entity Classification Rules for
LLCs
• Classification of LLCs in Existence before January 1,
1997
In general, unless it elects otherwise, an eligible LLC in
existence before January 1, 1997 has the same
classification that the entity claimed under prior law in
effect before 1997.
However, if an eligible LLC having a single owner
claimed to be a partnership under prior law, the LLC is
disregarded as an entity separate from its owner.
34
Entity Classification Rules for
LLCs
• Employment Tax Withholding and Reporting
for a Single-Member LLC
For wages paid on or after January 1, 2009,
disregarded single-owner entities generally are
treated as separate from their owners for
employment tax purposes. The owner is no
longer responsible for FICA and FUTA taxes and
obligations.
35
Entity Classification Rules for
LLCs
Prior to this date, the IRS permitted disregarded single-member LLCs
to report and withhold employment taxes under the name and
taxpayer identification number of the LLC, but the sole member still
retained ultimate responsibility for the employment tax liability.
The IRS position is that when employment tax deficiencies are
assessed against the single-member LLC, the assessment is also valid
against the member.
Similarly, the IRS takes the position that it can pursue collection action
against the single member owner's property if the LLC fails to pay
employment taxes due.
36
Entity Classification Rules for
LLCs
• Annual Income Tax Returns
Reporting of a LLC’s income on the appropriate tax form will depend
on the owner(s) tax status.
– Single-Member LLCs That are Disregarded Entities.
The existence of the LLC is ignored for purposes of filing a federal tax
return.
The income and expenses of the LLC are reported on whatever tax
form is filed by the member of the LLC.
Depending on the member’s tax status, this could be Form 1040, Form
1041, Form 1065, Form 1120 or Form 1120S.
37
Entity Classification Rules for
LLCs
– Single-Member LLCs That Elect to be Taxed as Corporations.
If a single-member LLC desires to file as a corporation, Form 8832,
Entity Classification Election, must be submitted.
LLCs that wish to be taxed as a S corporation must file Form 2553,
Election By a Small Business Corporation.
A domestic LLC electing S corporation status is no longer required to
file both Form 8832 and Form 2553. It will be treated as a corporation
as of the effective date of the S corporation election.
38
Entity Classification Rules for
LLCs
– Multi-Member LLCs.
Multiple-member LLCs will file partnership
returns using Form 1065.
A multiple-member LLC that desires to file as a
corporation, must make the same elections as
described above for single-member LLCs.
39
Federal Taxation Of Series
Limited Liability Companies
Series limited liability companies ("LLCs") have been around
since Delaware created them by statute in 1996.
Other than a Private Letter Ruling issued in 2008, the IRS had
never issued any formal guidance on the federal tax treatment of
series LLCs.
On September 14, 2010 the IRS issued Proposed Regulation
Sections 301.6011-6, 301.6071-2, and 301.7701-1(a)(5) (the
"Proposed Regulations") addressing the treatment of these
entities for federal income tax purposes.
40
Federal Taxation Of Series
Limited Liability Companies
• Background on Series LLCs
– What is a Series LLC?
A series LLC is a form of entity that allows a single LLC to establish one or
more series each of which has separate rights, powers, or duties and can
have different members.
Each series can have its own separate business purposes.
A series can be terminated without affecting the other series of the LLC.
A series can make distributions to its own members without regard to the
financial condition of the other series.
41
Federal Taxation Of Series
Limited Liability Companies
Most important, most series LLC legislation provides that debts,
liabilities and obligations incurred, contracted for or otherwise
existing with respect to a particular series are enforceable
against that series only, and not against the assets of the LLC
generally or any other series of the LLC.
Each series must be treated separately.
Books and records must be kept for each series and the assets of
each series must be held and accounted for separately.
42
Federal Taxation Of Series
Limited Liability Companies
– States That Authorize Series LLCs.
Currently it is possible to form a series LLC in the following nine states:
• Delaware
• Illinois
• Iowa
• Nevada
• Oklahoma
• Tennessee
• Texas
• Utah
• Wisconsin
43
Federal Taxation Of Series
Limited Liability Companies
– What are the Reasons for Using a Series LLC?
One of the principal benefits offered by series LLCs is
administrative convenience and cost savings.
One public document is filed with the appropriate state
department for the series LLC.
The members can then designate new series without any
additional public filings by preparing a separate series
agreement.
44
Federal Taxation Of Series
Limited Liability Companies
For industries that typically use separate entities for each asset
or business line this could provide a significant cost savings.
For example, in Delaware, a real estate investor who owns ten
properties and wants to separate each property for liability
purposes, can either form ten LLCs with $900 of state filing fees
or form a series LLC with only a $90 state filing fee. In each
subsequent year, the investor would file a single annual franchise
tax return and pay $250 versus ten annual franchise tax returns
at a total cost of $2,500.
45
Federal Taxation Of Series
Limited Liability Companies
What Guidance is Provided in the Proposed
Regulations?
– Entities to Which the Proposed Regulations
Apply
The Proposed Regulations apply to all domestic
series LLCs and foreign (i.e., non-U.S.) series LLCs
conducting insurance businesses.
•
46
Federal Taxation Of Series
Limited Liability Companies
– Separate Entity Status and Ownership of a Series
Under the Proposed Regulations, each series of a series
LLC will be treated as an entity formed under local law.
Whether a series is recognized as a separate entity for
federal tax purposes is determined under §301.7701-1
of the Treasury Regulations and general tax principals.
47
Federal Taxation Of Series
Limited Liability Companies
Each series that is recognized as a separate tax entity will be
classified under the "check-the-box" regulations and may make
any federal tax election it is otherwise eligible to make
independently of the series LLC or any other series.
Some planners have suggested that if the series LLC is the sole
owner of each of the series, each series will be classified as a
disregarded entity and a single income tax return can be filed by
the series LLC.
48
Federal Taxation Of Series
Limited Liability Companies
– Segregated Liability for Taxes (Maybe)
Because each series is treated as a separate entity formed under
local law for federal tax purposes, each series should only be
liable for federal income taxes related to that series.
However, the IRS reserves the right to impose liability for taxes
upon the series LLC or another series within such series LLC
under certain circumstances.
49
Federal Taxation Of Series
Limited Liability Companies
– No Employment Tax Guidance
At this time, the IRS has not issued guidance on the
federal employment tax treatment of a series LLC.
– Transition Rule
A taxpayer that has been treating all series within a
series LLC as one entity for federal income tax
purposes may continue to do so under the Proposed
Regulations.
50
Federal Taxation Of Series
Limited Liability Companies
Generally, this Transition Rule will apply provided that the
following requirements are satisfied:
• the series was established prior to September 14, 2010;
• the series conducted business on and prior to
September 14, 2010;
• no owner of the series treats the series as an entity
separate from the series LLC or any other series within
the series LLC for purposes of filing federal income tax
returns, informational returns, or withholding
documents in any taxable year;
51
Federal Taxation Of Series
Limited Liability Companies
• the series and the series LLC had a reasonable basis for
the classification; and
neither the series nor any owner of the series or the
series LLC was notified on or before the date the final
regulations are published in the Federal Register that the
classification of the series was under examination.
The Transition Rule will no longer apply if 50 percent or more of
the ownership interests of a series LLC or any of its series are
owned, in the aggregate, by persons who were not owners of
that series or series LLC prior to September 14, 2010.
52
Federal Taxation Of Series
Limited Liability Companies
– Annual Statement
The Proposed Regulations require an annual statement to be
filed by a series LLC and each of its series to provide the IRS with
certain identifying information to ensure the proper assessment
and collection of federal income tax.
The Proposed Regulations require the annual statement be filed
on or before March 15 of each year beginning after the date the
final regulations are published in the Federal Register.
53
Trusts and LLC as Eligible S
Corporation Shareholders
• Certain Trusts
Seven types of trusts qualify as eligible S corporation
shareholders.
Although the statute refers to these trusts as
“permitted shareholders,” none of the trusts is actually
treated as the shareholder for purposes of the S
corporation eligibility or shareholder consent
requirements.
54
Trusts and LLC as Eligible S
Corporation Shareholders
– Grantor-Type Trusts
An eligible shareholder includes a trust all of which is treated as
owned by an individual who is a U.S. citizen or resident.
If a grantor trust qualifies as an eligible shareholder, the deemed
owner of the trust (and not the trust itself) is treated as the
shareholder of the corporation for purposes of the S corporation
eligibility requirements.
The deemed owner (rather than the trust) files any required
consent to an S election.
55
Trusts and LLC as Eligible S
Corporation Shareholders
– Grantor-Type Trusts Following Death of Owner
An eligible shareholder includes a qualifying grantortype trust which continues in existence following the
deemed owner's death.
Such a trust is often designed to continue in existence
as an irrevocable trust after the death of the deemed
owner.
56
Trusts and LLC as Eligible S
Corporation Shareholders
Such a trust generally continues to qualify as an eligible S
corporation shareholder until the earlier of: (1) the transfer of
the stock by the trust; or (2) the expiration of the two-year
period beginning on the day of the deemed owner's death.
However, if it qualifies, and a qualified subchapter S trust (QSST)
election or an electing small business trust (ESBT) and an ESBT
election is made for the trust, the trust can continue to be an
eligible shareholder after the transfer or the expiration of the
two-year period.
57
Trusts and LLC as Eligible S
Corporation Shareholders
– Testamentary Trusts
An eligible shareholder includes a trust to which stock is
transferred pursuant to the terms of a will or qualifying grantortype trust.
The transferee trust qualifies as an eligible shareholder until the
earlier of (1) the date on which the trust disposes of the S
corporation stock or (2) the end of the two-year period
beginning on the date on which the S corporation stock is
transferred to the trust, unless the trust qualifies as another type
of eligible trust.
58
Trusts and LLC as Eligible S
Corporation Shareholders
– Voting Trusts
An eligible shareholder includes a trust created primarily to
exercise the voting power of stock transferred to it and which
meets certain specific requirements
Each beneficiary of a voting trust is treated as a shareholder for
all subchapter S purposes.
Because each beneficiary is treated as a shareholder, a voting
trust cannot be used to circumvent the 100-shareholder limit.
59
Trusts and LLC as Eligible S
Corporation Shareholders
– Qualified Subchapter S Trusts (QSSTs)
An eligible trust also includes a “qualified subchapter S trust,” or
“QSST.”
If the QSST income beneficiary so elects, the QSST is treated as a
grantor-type trust with respect to the S corporation stock it holds
and, thus, qualifies as an eligible shareholder.
60
Trusts and LLC as Eligible S
Corporation Shareholders
• Trust Requirements
A trust qualifies as a QSST only if all of the income of the trust is
distributed (or is required to be distributed) currently to one
individual who is a U.S. citizen or resident and the terms of the
trust require that:
– during the current income beneficiary's life, there
can be only one income beneficiary;
– any corpus distributed during the current income
beneficiary's life may be distributed only to that
income beneficiary;
61
Trusts and LLC as Eligible S
Corporation Shareholders
–the current income beneficiary's income
interest in the trust will terminate on the
earlier of that income beneficiary's death or
the termination of the trust; and
–upon termination of the trust during the
current income beneficiary's life, the trust
will distribute all its assets to that income
beneficiary.
62
Trusts and LLC as Eligible S
Corporation Shareholders
• QSST Election
A QSST is treated as an eligible shareholder only if the
current income beneficiary elects to have the QSST
treated as an eligible shareholder with respect to the
stock of the corporation.
63
Trusts and LLC as Eligible S
Corporation Shareholders
• Procedure
The QSST election is made by the current income beneficiary of
the trust or by his or her legal representative.
A separate QSST election must be made with respect to the stock
of each corporation held by the trust for which an S election is
desired.
A special election procedure is available for an electing small
business trust (ESBT) to convert to a QSST or for a QSST to
convert to an ESBT.
64
Trusts and LLC as Eligible S
Corporation Shareholders
• Deadline
If S corporation stock is transferred to a trust, the QSST election
must be filed within the later of:
– the two-month-and-16-day period beginning on the
date on which the stock is initially transferred to the
trust; or
– the two-month-and-16-day period beginning on the
first day of the first taxable year for which the
corporation's S election is effective.
65
Trusts and LLC as Eligible S
Corporation Shareholders
• Electing Small Business Trusts (ESBTs)
Any trust, except an electing QSST, a charitable remainder trust,
or a tax-exempt trust can be an ESBT if the following conditions
are met:
– the trust has no beneficiaries other than
individuals, estates, or certain charitable
organizations;
– no interest in the trust was acquired by purchase;
and
– an election is made to treat the trust as an ESBT.
66
Trusts and LLC as Eligible S
Corporation Shareholders
• ESBT Election
An ESBT is treated as an eligible shareholder only if the trustee elects to have
the ESBT treated as an eligible shareholder with respect to the stock of the
corporation.
A trust that ceases to be a grantor-type trust and that satisfies the ESBT
requirements may elect to be an ESBT.
Likewise, a testamentary trust that is a permitted shareholder and that
satisfies the requirements of an ESBT may file an ESBT election.
If certain requirements are met, a QSST may automatically convert to an ESBT.
An ESBT may automatically convert to a QSST if certain conditions are met.
67
Trusts and LLC as Eligible S
Corporation Shareholders
• Procedure
To make the ESBT election, the trustee must file an
election statement with the IRS service center with
which the S corporation files its income tax return.
68
Trusts and LLC as Eligible S
Corporation Shareholders
• Deadline
The election must be filed within two months and 16
days after the S corporation stock is transferred to the
trust.
If the trust holds stock of a C corporation that makes an
S election, the trust must file the ESBT election within
two months and 16 days of the date on which the S
election is effective.
69
Trusts and LLC as Eligible S
Corporation Shareholders
• Pension Trusts
Qualified retirement plans are eligible to own S
corporation stock in taxable years beginning after 1997.
• Foreign Trusts
– Foreign trusts do not qualify as eligible S corporation
shareholders.
– Note: This rule applies to foreign trusts that are treated as
grantor trusts under IRC section 679.
70
Trusts and LLC as Eligible S
Corporation Shareholders
• Disregarded Entities—Partnerships and Limited Liability
Companies
If a single-owner limited liability company (LLC) is disregarded as
an entity separate from its owner and the owner is an eligible S
shareholder (e.g., an individual or a QSST), the LLC qualifies as an
eligible S corporation shareholder.
Similarly, a state-law limited partnership formed by two limited
liability companies owned by the same person is an eligible S
shareholder when both the partnership and the limited liability
companies are disregarded entities.
71