Termination of Election

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202609002
Release Date: 2/27/2026
Index Number: 1361.01-02, 1361.03-03,
1362.00-00, 1362.02-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PT&E:B01
PLR-109372-25
Date:
November 24, 2025
LEGEND
X = ---
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State = ---
Date 1 = ---
Date 2 = ---
Trust = ---
--- a = ---
Dear ---:
This ruling is in response to a letter dated February 27, 2025, submitted on behalf of X by X’s authorized representatives, requesting relief under § 1362(f) of the Internal Revenue Code (“Code”).

# FACTS

X was incorporated under the laws of State on Date 1. Effective Date 1, X elected to be treated as an S corporation. On Date 2, all shares of X were transferred to Trust. X represents that Trust has at all times since Date 2 met the requirements of an Electing Small Business Trust (ESBT) except that the trustees of Trust did not make a timely PLR-109372-25 2 ESBT election under § 1361(e)(3), thus causing X's S corporation election to terminate effective Date 2.
X represents that there was no tax avoidance or retroactive tax planning involved in the failure of Trust to file the ESBT election and the resulting termination of X’s S corporation election. X and its shareholders agree to make any adjustments required as a condition of obtaining relief under the inadvertent termination rule as provided under § 1362(f) of the Code that may be required by the Secretary.

# LAW AND ANALYSIS

Section 1361(a)(1) of the Code 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 such year.
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 1 class of stock.
Section 1361(c)(2)(A)(i) provides that, for purposes of section 1361(b)(1)(B), a trust all of which is treated (under subpart E of part I of subchapter J of chapter 1) as owned by an individual who is a citizen or resident of the United States may be an S corporation shareholder.
Section 1361(c)(2)(A)(v) provides that for purposes of § 1361(b)(1)(B), an ESBT is a permissible S corporation shareholder. Section 1361(c)(2)(A)(v) provides that, for purposes of § 1362(b)(1)(B), an ESBT may be an S corporation shareholder.
Section 1361(e)(1)(A) provides that an ESBT means any trust if (i) such trust does not have as a beneficiary any person other than (I) an individual, (II) an estate, (III) an organization described in § 170(c)(2), (3), (4), or (5), or (IV) an organization described in § 170(c)(1) which holds a contingent interest in such trust and is not a potential current beneficiary, (ii) no interest in such trust was acquired by purchase, and (iii) an election under § 1361(e) applies to such trust.
Section 1361(e)(3) provides that an election under § 1361(e) shall be made by the trustee. Any such election shall apply to the taxable year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the Secretary.
PLR-109372-25 3
Section 1.1361-1(m)(2)(i) provides, in part, that the trustee of an ESBT must make the
ESBT election by signing and filing, with the service center where the S corporation files its income tax return, a statement that meets the requirements of § 1.1361-1(m)(2)(ii).
Section 1.1361-1(m)(2)(iii) provides that the ESBT election must be filed within the time requirements prescribed in § 1.1361-1(j)(6)(iii) for filing a QSST election.
Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated whenever (at any time on or after the 1st day of the 1st taxable year for which the corporation is an S corporation) such corporation ceases to be a small business corporation.
Section 1362(f) provides, in relevant part, that if (1) an election under § 1362(a) by any corporation 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 was terminated under § 1362(d)(2) or (3) or § 1361(b)(3)(C); (2) the Secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent; (3) no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination, steps were taken so that the corporation for which the termination occurred is a small business corporation or a qualified subchapter S subsidiary, as the case may be; and (4) the corporation for which the election was made or the termination occurred, and each person who was a shareholder in such corporation at any time during the period specified pursuant to § 1362(f), agrees to make the adjustments (consistent with the treatment of such corporation as an S corporation or a qualified subchapter S subsidiary, as the case may be) as may be required by the Secretary with respect to such period, then, notwithstanding the circumstances resulting in such ineffectiveness or termination, such corporation shall be treated as an S corporation or a qualified subchapter S subsidiary, as the case may be, during the period specified by the Secretary.
Section 1.1362-4(d) provides that the Commissioner may require any adjustments that are appropriate. In general, the adjustments required should be consistent with the treatment of the corporation as an S corporation during the period specified by the Commissioner.

# CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that X's
S election terminated on Date 2 because an ESBT election was not filed for Trust. We further conclude that the termination of X's S election on Date 2 was inadvertent within the meaning of § 1362(f). Accordingly, X will be treated as an S corporation effective Date 2, and thereafter, provided X's S corporation election was otherwise valid and not otherwise terminated under § 1362(d).
PLR-109372-25 4
This ruling in contingent upon the trustees of Trust filing an appropriately completed
ESBT election for Trust effective Date 2 and upon Trust and its beneficiaries filing amended federal income tax returns for all open years consistent with the treatment of Trust as an ESBT effective Date 2. The election and the amended returns must be filed with the appropriate service center within 120 days following the date of this letter, and a copy of this letter should be attached to the election and returns.
Additionally, a payment of $a must be sent to the following address: Internal Revenue
Service, Kansas City Submission Processing Campus, 333 W. Pershing Road, Kansas
City, MO 64108, Stop 7777, Attn: Manual Deposit. X must send this payment no later than 45 days from the date of this letter. If this condition is not met, then this ruling is null and void. Furthermore, if this condition is not met, X must notify the Kansas City Submission Processing Campus that its S corporation election has terminated.
Except as specifically ruled upon above, we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the
Code. Specifically, we express or imply no opinion regarding X’s eligibility to be an S corporation or Trust’s eligibility to be an ESBT.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent.
In accordance with the power of attorney on file with this office, a copy of this letter is being sent to the taxpayer's authorized representative.
Sincerely,
Joy C. Spies
Senior Technician Reviewer, Branch 1
Office of Associate Chief Counsel
(Passthroughs, Trusts & Estates)
PLR-109372-25 5 cc: ---
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