STOCK TRANSFERRED TO LLC DOESN'T AFFECT S STATUS.

UIL Number(s) 1362.01-00

                                             Date: August 8, 1997

[1] This responds to your letter dated March 6, 1997, submitted on behalf of X in which a ruling is requested under section 1362 of the Internal Revenue Code.

FACTS

[2] X was formed as a corporation. A is a shareholder of X. In Date1, the shareholders of X made an election to have X taxed as an S corporation.

[3] On Date2, X received a ruling from this office that Trust qualified as an S corporation shareholder under section 1361(c)(2)(A)(i).

[4] Trust plans to form LLC. A plans to transfer shares of X to Trust. Trust plans to exchange shares of X for 100% of the ownership interests in LLC.

[5] X and A represent that X is an S corporation, that A is a citizen of the United States, and that LLC will not elect to be taxed as an association.

LAW AND ANALYSIS

[6] 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 1362(a) provides, in part, that a small business corporation may elect to be an S corporation.

[7] Section 1361(b)(1)(B) provides that one of the requirements for a taxpayer to be a small business corporation is that the taxpayer is a domestic corporation which does not have as a shareholder a person . . . other than a trust described in subsection (c)(2) who is not an individual.

[8] Section 301.7701-3(b)(1)(ii) of the Procedure and Administration Regulations states that, unless it elects otherwise, a domestic eligible entity with a single owner is disregarded as an entity separate from its owner. Section 301.7701-3(a) defines an eligible entity as a business entity that is not classified as a corporation under section 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8). Accordingly, the owner of the LLC is treated as owning the LLC's assets directly. Thus, in determining whether a corporation is eligible to elect S status or continue its eligibility as an S corporation, any shares held by a single member LLC are treated as being owned directly by the LLC's owner.

[9] Here, X stock will be transferred by Trust to LLC, which is wholly owned by Trust. Because single member LLCs are disregarded as entities separate from their owners for federal tax purposes, the transfer of the X shares to LLC does not terminate the S corporation election of X. In addition, the holding of the X shares by LLC will not adversely affect the ability of X from qualifying as an S corporation.

CONCLUSION

[10] Based solely on the facts submitted and the representations made, we conclude that the transfers of X shares to LLC does not terminate the S corporation election of X. In addition, the holding of the X shares by LLC will not adversely affect the ability of X from qualifying as an S corporation.

[11] Except as specifically set forth above, no opinion is expressed or implied as to the federal income tax consequences of the transaction described above under any other provision of the Code. Specifically, no opinion is expressed concerning whether X is, in fact, an S corporation for federal tax purposes; nor was any opinion requested nor expressed concerning Trust's present qualification as a permissible shareholder of X.

[12] This ruling is directed only to the taxpayer on whose behalf it was requested. Section 6110(j)(3) of the Code provides that you, the taxpayer's authorized representative, pursuant to a power of attorney on file with this office.

                                   Sincerely yours,