QSST Qualified Subchapter S Trust Question

[Brett Roth]

I have a tricky one for any of the tax gurus that would like to take a stab at it.  

Here's a situation.  S-Corp stock is held in a QSST (Qualified Subchapter S Trust) and the S-Corp stock will generate a loss for the year.  Let's assume active loss, but I'd be curious about passive losses also and if there is a difference there.   CPA thinks that the losses are not passed through to the Trust beneficiaries tax return but instead are held by the trust.  I'm thinking CPA is confused on the specifics of QSST's and is thinking about some other sort of trust maybe.  I'm thinking CPA might not be correct because the whole point of a QSST is that the S-Corp stock still behaves like an S-Corp and is a pass through entity for profits and losses even though it is held in trust.  The losses are attributed to the S-Corp stock and to keep things simple lets assume the trust holds no other assets.   Am I right?  Those losses should pass through to the the beneficiaries individual return?   Thoughts?

thanks

Brett

[Eamonn McElroy]

@Brett Roth QSST's are a little tricky because the QSST election causes them to behave as grantor trusts with respect to the S Corp...most of the time.

Items of income, loss, deduction, and credit passed through from the S Corp to the trust are included on the income beneficiary's tax return as if the trust is disregarded.

Current income from the S Corp is required to be distributed annually as well to the income beneficiary.  Note this is trust income and not tax income.  (i.e. cash distributions from the S Corp to the trust must be redistributed to the income beneficiary).

"...that the losses are not passed through to the Trust beneficiaries..."

One requirement of a QSST is that there can only be one income beneficiary during the life of the current income beneficiary.  Be careful here.  Just one of the easy ways to bust a QSST/S election.  There is an exception for "separate and independent" ownership in the Sec 1361 regs.