Inadvertent Terminations

Internal Revenue Service
Number: 202551033
Release Date: 12/19/2025
Index Number: 1362.00-00, 1362.02-00,
1362.04-00
---
---
---
---
Department of the Treasury
Washington, DC 20224
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
---, ID No. ---
Telephone Number:
---
Refer Reply To:
CC:PSI:B01
PLR-105215-25
Date:
July 25, 2025
LEGEND
---
X =
---
A = ---
---
B = ---
---
---
Agreement 1 =
---
---
Agreement 2 =
---
Date 1 = ---
Date 2 = ---
Date 3 = ---
Date 4 = ---
Date 5 = ---
State =
2
PLR-105215-25
Dear ---:
This letter responds to a letter dated February 6, 2025, submitted on behalf of X by X’s authorized representatives, requesting relief under § 1362(f) of the Internal Revenue Code (Code).

# FACTS

According to the information submitted, X is a limited liability company organized under the laws of State on Date 1. For federal tax purposes, X was treated as a partnership from Date 1 through Date 2. X filed an election to be treated as an S corporation pursuant to § 1362(a) of the Code, effective Date3.
On Date1, A and B executed Agreement 1 and became shareholders of X. The terms of
Agreement 1 did not provide for identical rights to distribution and liquidation proceeds.
Agreement 1 provided that “[m]embers are entitled to interest or other compensation for or on account of their capital contributions to [X] that exceed the ownership ratio established in Schedule 2 of this document.” Additionally, Agreement 1 contained partnership provisions, including a requirement that “[d]istributions in liquidation of [X] or in liquidation of a Member’s interest shall be made in accordance with the positive capital account balances pursuant to” § 1.704-1(b)(2)(ii)(b)(2).” Furthermore, Agreement 1 provided that upon the winding up of X, the remaining liquidation proceeds were distributable “[t]o Members in the amount of their respective adjusted Capital Account balances on the date of the distribution.” These provisions of Agreement 1 caused X to have more than one class of stock under § 1361(b)(1)(D), and therefore X’s S corporation election intended to be effective Date 3 was ineffective. X also made disproportionate distributions to A and B after Date 3.
X represents that it executed an amended operating agreement (Agreement 2) on
Date 4 that eliminated the provisions that caused X to have more than one class of stock. X also represents that, on Date 5, X made a corrective distribution to B that brought the aggregate distributions to X’s shareholders into the same proportion as their ownership interests.
X represents that the circumstances surrounding the ineffectiveness of X’s S corporation election were inadvertent and not the result of tax avoidance or retroactive tax planning. X further represents that for each taxable year beginning Date 3, X and its shareholders have filed consistently with X being an S corporation. In addition, X and its shareholders agree to make any adjustments that may be required by the Secretary as a condition of obtaining relief under § 1362(f).

# LAW AND ANALYSIS

Section 1361(a)(1) provides that the term “S corporation” means, with respect to any taxable year, a small business corporation for which an election under § 1362(a) is in effect for the year.
PLR-105215-25 3
Section 1361(b)(1) defines a “small business corporation” as a domestic corporation which is not an ineligible corporation and which does not (A) have more than 100 shareholders, (B) have as a shareholder a person (other than an estate, a trust described in § 1361(c)(2), or an organization described in § 1361(c)(6)) who is not an individual, (C) have a nonresident alien as a shareholder, and (D) have more than one class of stock.
Section 1.1361-1(l)(1) of the Income Tax Regulations provides that a corporation is generally treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds.
Section 1.1361-1(l)(2)(i) provides, in part, that the determination of whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is made based on the corporate charter, articles of incorporation, bylaws, applicable state law, and binding agreements relating to distribution and liquidation proceeds (collectively, governing provisions).
Section 1362(a)(1) provides that, except as provided in § 1362(g), a small business corporation may elect to be an S corporation.
Section 1362(f) provides, in part, that if (1) an election under § 1362(a) by any corporation (A) was not effective for the taxable year for which made (determined without regard to § 1362(b)(2)) by reason of a failure to meet the requirements of § 1361(b) or (B) was terminated under § 1362(d)(2), (2) the Secretary determines that the circumstances resulting in the ineffectiveness or termination were inadvertent, (3) no later than a reasonable period of time after discovery of the circumstances resulting in the ineffectiveness or termination, steps were taken so that the corporation for which the election was made or the termination occurred is a small business corporation, and

(4) the corporation for which the election was made or the termination occurred, and each person who was a shareholder of the corporation at any time during the period specified pursuant to § 1362(f), agrees to make such adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to such period, then, notwithstanding the circumstances resulting in the ineffectiveness or termination, the corporation will be treated as an S corporation during the period specified by the Secretary.

# CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that
X’s S corporation election was ineffective on Date 3 because X had more than one class of stock. We further conclude, however, that the circumstances that caused this S election to be ineffective were inadvertent within the meaning of § 1362(f). Therefore, under § 1362(f), X will be treated as being an S corporation beginning Date 3 and thereafter, provided that its S corporation election was otherwise valid and has not otherwise terminated under § 1362(d).
PLR-105215-25 4
Except as specifically ruled above, we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the
Code. Specifically, we express or imply no opinion on whether X was or is otherwise eligible to be an S corporation.
The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the ruling request, it is subject to verification on examination.
This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) provides that this ruling may not be used or cited as precedent.
Pursuant to a power of attorney on file with this office, we are sending a copy of this letter to X’s authorized representatives.
Sincerely,
Joy C. Spies
Senior Technician Reviewer, Branch 1
Office of the Associate Chief Counsel
(Passthroughs, Trusts, and Estates) cc: ---
---
---
---
---
---
---
---
---
---