                       T.C. Memo. 1997-332



                     UNITED STATES TAX COURT



                    PRIMCO MANAGEMENT COMPANY,
         ALFRED DREYFUS GOLDMAN REVOCABLE LIVING TRUST,
  ALFRED D. GOLDMAN, FIDUCIARY, TAX MATTERS PERSON, Petitioner
                                v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 13146-96.             Filed July 23, 1997.


     Clarke Lewis Randall, for petitioner.

     William A. Heard III, for respondent.


                       MEMORANDUM OPINION


     ARMEN, Special Trial Judge:   This matter is before the Court

on petitioner's Motion to Dismiss for Lack of Jurisdiction. The

issue to be decided is whether an S corporation, whose sole

shareholders are two grantor trusts, constitutes a "small S

corporation" within the meaning of section 301.6241-1T(c)(2),
                               - 2 -


Temporary Proced. & Admin. Regs., 52 Fed. Reg. 3003 (Jan. 30,

1987), that is excluded from the unified S corporation audit and

litigation procedures prescribed by sections 6241 through 6245.1

Background

     On March 26, 1996, respondent issued a Notice of Final S

Corporation Administrative Adjustment (FSAA) to the tax matters

person (TMP) of Primco Management Company (Primco) determining

adjustments to Primco's tax returns for 1990, 1991, and 1992.    On

June 24, 1996, Julian P. Kornfeld, Esq., filed a petition for

readjustment on behalf of Primco contesting the above-described

notice.   The petition includes allegations that Primco is a small

S corporation that is not subject to the unified S corporation

audit and litigation procedures.

     Respondent filed an answer to the petition denying the

allegation that Primco is not subject to the unified S

corporation audit and litigation procedures.   In particular,

respondent alleges that, during the years in issue, Primco's sole

shareholders were the Alfred Dreyfus Goldman Revocable Living

Trust and the Monty H. Goldman Revocable Living Trust

(collectively referred to hereinafter as the trusts).    Respondent

further contends that the trusts are not "natural persons" within

the meaning of section 301.6241-1T(c)(2), Temporary Proced. &

     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
                               - 3 -


Admin. Regs., 52 Fed. Reg. 3003 (Jan. 30, 1987), and, therefore,

that Primco is not excluded from the unified S corporation audit

and litigation procedures.

     A reply to respondent's answer, filed on behalf of Primco,

includes allegations that, because revocable trusts are regarded

as a nullity for Federal income tax purposes, it is appropriate

to conclude that Primco's sole shareholders are the two

individual grantors of the trusts for purposes of determining

whether Primco is a small S corporation under the governing

regulation.2

     By order dated October 3, 1996, Primco was directed to file

an amendment to petition identifying Primco's tax matters person,

as well as the name and address of the shareholder commencing the

case.3   Shortly thereafter, the Court received and filed an

amendment to petition, which indicates that Primco's tax matters

person (and the shareholder commencing the case) is Alfred D.




     2
        Although the reply filed on behalf of Primco includes
allegations that Primco was not owned by the trusts during the
years in issue, counsel for petitioner subsequently conceded at
the hearing of this matter that Primco was owned by the trusts
during the years in issue.
     3
        The pleadings filed in this case on behalf of Primco do
not comply with the controlling statutory provisions, which
generally require that a petition for readjustment be filed by
the tax matters person or a shareholder other than the tax
matters person. See secs. 6244 and 6226; Rule 240(c)(1)(B);
Gold-N-Travel, Inc. v. Commissioner, 93 T.C. 618 (1989).
                                 - 4 -


Goldman.4    The amendment to petition restates the position that

Primco is not subject to the unified S corporation audit and

litigation procedures.

     Petitioner subsequently filed a Motion to Dismiss for Lack

of Jurisdiction consistent with the position outlined above.

Respondent filed an objection to petitioner's motion to dismiss.

     This matter was called for hearing at the Court's motions

session in Washington, D.C., on May 28, 1997.     Counsel for the

parties appeared at the hearing and presented argument with

respect to petitioner's motion.

Discussion

         The issue to be decided is whether the unified S

corporation audit and litigation procedures contained in sections

6241-6245 apply to Primco, an S corporation whose sole

shareholders during the years in issue were two grantor trusts.

If we conclude that the unified procedures do not apply, then the

FSAA issued to Primco is invalid, and we must dismiss this case

for lack of jurisdiction.

     Subchapter D of chapter 63 of subtitle F was codified by

section 4(a) of the Subchapter S Revision Act of 1982, Pub. L.


     4
        Notwithstanding the recitals in the amendment to
petition, the Court ultimately changed the caption of this case
to read "Primco Management Company, Alfred Dreyfus Goldman
Revocable Living Trust, Alfred D. Goldman, Fiduciary, Tax Matters
Person, Petitioner v. Commissioner of Internal Revenue,
Respondent".
                                - 5 -


97-354, 96 Stat. 1691-1692.5   Subchapter D provides that the

items of income, loss, deduction, and credit of S corporations

generally will be determined in a unified manner at the corporate

level as opposed to the individual shareholder level.

     Section 6241 provides express authority for the Secretary to

prescribe regulations that create exceptions to the unified S

corporation audit and litigation procedures.   On January 27,

1987, the Secretary promulgated section 301.6241-1T(c)(2),

Temporary Proced. & Admin. Regs., 52 Fed. Reg. 3003 (Jan. 30,

1987), providing an exception to the unified S corporation audit

and litigation procedures for small S corporations.    Section

301.6241-1T(c)(2), Temporary Proced. & Admin. Regs., is effective

for any taxable year of an S corporation the due date of the

return for which is on or after January 30, 1987.     Sec. 301.6241-

1T(c)(2)(i), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 3003

(Jan. 30, 1987).    The section provides in pertinent part as

follows:

           (2) Exception for small S corporations--

                *     *    *    *    *    *    *

               (ii) Five or fewer shareholders. For
     purposes of this paragraph (c), an S corporation shall
     not include a small S corporation. A small S
     corporation is defined as an S corporation with 5 or

     5
       Subchapter D, consisting of secs. 6241 through 6245, was
repealed applicable to tax years beginning after Dec. 31, 1996.
Small Business Job Protection Act of 1996, Pub. L. 104-188, sec.
1307(c)(1), 110 Stat. 1755, 1781.
                                - 6 -


     fewer shareholders, each of whom is a natural person or
     an estate. * * * The limitation is applied to the
     number of natural persons and estates that were
     shareholders at any one time during the taxable year of
     the corporation. * * *

               (iii) Special rule. The exception provided
     in paragraph (c)(2)(ii) of this section does not apply
     to an S corporation for a taxable year if any
     shareholder in the corporation during that taxable year
     is a pass-through shareholder. For purposes of this
     paragraph (c)(2)(iii), a pass-through shareholder is--

                    (A) A trust;
                    (B) A nominee; or
                    (C) Other similar pass-through persons
     through whom other persons have an ownership
     interest in the stock of the S corporation.

     For purposes of the   preceding sentence, a shareholder's
     estate shall not be   treated as a pass-through
     shareholder. [Sec.    301.6241-1T(c)(2)(ii) and (iii),
     Temporary Proced. &   Admin. Regs., 52 Fed. Reg. 3003
     (Jan. 30, 1987).]

In sum, section 301.6241-1T(c)(2), Temporary Proced. & Admin.

Regs., provides an exception to the unified audit and litigation

procedures for a small S corporation, which is defined as an S

corporation with five or fewer shareholders, each of whom is a

natural person or an estate.    However, the small S corporation

exception does not apply for a taxable year if any shareholder in

the corporation during that taxable year is a pass-through

shareholder such as a trust, nominee, or similar pass-through

person.

     Petitioner contends that the special rule set forth in

section 301.6241-1T(c)(2)(iii), Temporary Proced. & Admin. Regs.,

does not apply in this case because Primco's sole shareholders
                                         - 7 -


during the years in issue were two grantor trusts.                   Petitioner

reasons that, by virtue of the general attributes of a grantor

trust, as well as the particular treatment afforded a grantor

trust as a permitted shareholder of an S corporation, the deemed

owners of the trusts should be considered Primco's shareholders

for purposes of applying section 301.6241-1T(c)(2), Temporary

Proced. & Admin. Regs.          In this regard, petitioner relies

primarily upon section 1361(c)(2), which provides that a grantor

trust may be a shareholder of an S corporation and that the

deemed owner of the trust will be treated as the shareholder.6

     6
         Sec. 1361(c)(2)(B)(i) provides in pertinent part:

     (c) Special Rules for Applying Subsection (b).--

           *    *       *        *       *       *       *

           (2) Certain trusts permitted as shareholders.--

                (A) In general.--For purposes of subsection
           (b)(1)(B), the following trusts may be
           shareholders:

                     (i) A trust all of which is treated
                (under subpart E of part I of subchapter J of
                this chapter) as owned by an individual who
                is a citizen or resident of the United
                States.

                    *       *        *       *       *       *   *

                (B) Treatment as shareholders.--For purposes
           of subsection (b)(1)--

                     (i) In the case of a trust described in
                clause (i) of subparagraph (A), the deemed
                owner shall be treated as the shareholder.
                                                    (continued...)
                               - 8 -


Petitioner argues that his position is further supported by

section 301.6109-1(a)(2), Proced. & Admin. Regs., which provides

that a grantor trust is not required to obtain a separate tax

identification number, and by section 1.671-4(b), Income Tax

Regs., which provides that a grantor trust is not required to

file a separate tax return.

     We begin our analysis with the observation that section

1361(c)(2), which provides that a grantor trust may be a

shareholder of an S corporation and that the deemed owner of such

grantor trust will be treated as the shareholder of the S

corporation, expressly states that the provision applies for

purposes of section 1361(b), which is part of subtitle A.

Significantly, section 1361 makes no reference to its

applicability to section 6241, which is part of subtitle F, or

the regulations thereunder, nor is there any cross-reference in

subtitle F to section 1361.   Equally important, the two

provisions are designed to serve two wholly independent purposes.

On the one hand, section 1361(c) is a substantive provision of

law--its primary purpose is to define the types of trusts that

are permitted to be shareholders of an S corporation.   In

contrast, section 301.6241-1T(c)(2), Temporary Proced. & Admin.

Regs., is a procedural provision that defines the circumstances

     6
      (...continued)
Subpart E of part I of subchapter J contains the so-called
grantor trust provisions.
                               - 9 -


under which an S corporation will qualify for the small S

corporation exception to the unified S corporation audit and

litigation procedures.   Considering the independent purposes that

section 1361(c) and section 301.6241-1T(c)(2), Temporary Proced.

& Admin. Regs., are designed to serve, and consistent with

accepted principles of statutory construction, we do not treat

section 1361(c) as a limitation or qualification on the otherwise

plain meaning of section 301.6241-1T(c)(2)(iii), Temporary

Proced. & Admin. Regs.

     Petitioner's reliance on section 1.671-4(b), Income Tax

Regs., and section 301.6109-1(a)(2), Proced. & Admin. Regs., is

likewise misplaced.   Although these provisions indicate that a

grantor trust generally is not treated as a separate taxable

entity for purposes of the Federal income tax, it is clear, as

discussed above, that a grantor trust, to the extent it

constitutes a form of pass-through entity, is not disregarded

with respect to the application of the unified audit and

litigation procedures.

     Section 301.6241-1T(c)(2), Temporary Proced. & Admin. Regs.,

plainly states that the small S corporation exception to the

unified S corporation audit and litigation procedures only

applies to an S corporation with five or fewer shareholders each

of whom is a natural person or estate.   The small S corporation

exception does not apply to an S corporation for a taxable year
                               - 10 -


if any shareholder in the corporation during that taxable year is

a pass-through shareholder; i.e., a trust, nominee, or similar

pass-through person.    Because Primco's sole shareholders during

the years in issue were two grantor trusts, we hold that Primco

does not qualify under the small S corporation exception to the

unified S corporation audit and litigation procedures, section

301.6241-1T(c)(2), Temporary Proced. & Admin. Regs., and,

therefore, that the FSAA issued to Primco is valid.

Consequently, we shall deny petitioner's Motion to Dismiss for

Lack of Jurisdiction.

     To reflect the foregoing,

                                      An order will be issued

                                 denying petitioner's Motion to

                                 Dismiss for Lack of Jurisdiction.
