Publication 102
trusts (ESBTs), and, for certain periods of time, testa-
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The beneficiary, or the beneficiary’s legal representative,
mentary trusts may be shareholders. Corporations,
elects to have the trust qualify as a QSST.
partnerships, and foreign trusts can’t be shareholders.
Note: A trust that qualifies as a QSST for federal purposes
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It must not have a nonresident alien as a shareholder.
automatically qualifies as a QSST for Wisconsin. The
beneficiaries aren’t required to make a separate Wisconsin
election. The QSST, not its beneficiaries, is considered to be
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It must have only one class of stock. A corporation is
treated as having only one class of stock if all outstand-
the shareholder for purposes of filling out the Wisconsin
ing shares of stock of the corporation confer identical
Schedules 5K-1. The QSST must file Wisconsin fiduciary
rights to distributions and liquidation proceeds. Stock
income tax returns, Form 2, to report its share of the tax-
may have differences in voting rights and still be consid-
option (S) corporation income whether or not all of the trust
ered one class of stock. Straight debt isn’t treated as a
income is distributed. In addition, the beneficiaries of the
QSST must file Wisconsin individual income tax returns.
second class of stock if certain conditions are met. See
the Internal Revenue Code and federal regulations for
further details.
D. Electing Small Business Trust (ESBT)
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It must not be a financial institution that uses the reserve
An ESBT must meet all of the following requirements:
method of accounting for bad debts; an insurance
company taxed under Subchapter L of the Internal
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It must have as beneficiaries only individuals, estates, or
Revenue Code; a corporation that takes the tax credit for
certain charitable organizations. For taxable years
doing business in a United States possession; or a DISC
beginning on or after January 1, 1997, and before
(domestic international sales corporation), an IC-DISC
January 1, 1998, charities can only hold contingent
(interest charge domestic international sales corpora-
interests and can’t be potential current beneficiaries.
tion), or a former DISC.
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It must not have made a QSST election with respect to
This is a very brief summary of the federal requirements.
any stock it holds.
Refer to IRC section 1361(b), as amended to December 31,
1996, and as amended by P.L. 105-33 and P.L. 105-34, for
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It cannot be a tax-exempt trust.
more details.
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No interests in the trust were acquired by purchase.
C. Qualified Subchapter S Trust (QSST)
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The trustee elects to have the trust qualify as an ESBT.
A QSST is a trust that meets all of the following require-
ments:
Note: A trust that qualifies as an ESBT for federal purposes
automatically qualifies as an ESBT for Wisconsin. The
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During the life of the current income beneficiary, there
trustee isn’t required to make a separate Wisconsin election.
can be only one income beneficiary.
For Wisconsin purposes, the portion of an ESBT that
consists of stock of one or more tax-option (S) corporations
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Corpus distributions during the current income benefi-
is treated as a separate trust, the same as for federal purposes.
ciary’s life can be made only to him or her.
The Wisconsin net income for that portion is determined
under IRC section 641(d), as modified by sec. 71.05(6) to
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The current income beneficiary’s income interest must
(12), (19), and (20), Wis. Stats. The separate trust is taxed on
terminate on the earliest of his or her death or the
its Wisconsin taxable income at the highest Wisconsin
termination of the trust.
income tax rate applicable to trusts.
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If the trust terminates during the current income benefi-
E. Qualifying Subchapter S Subsidiary (QSSS)
ciary’s life, the trust’s assets must all be distributed to
the current income beneficiary.
A QSSS is a corporation that meets all of the following
requirements:
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All of the trust’s income must be distributed, or required
to be distributed, currently to one individual who is a
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It is created or organized in the United States or under
citizen or resident of the United States.
the laws of the United States or any state.
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