Inadvertent Terminations

Internal Revenue Service
Number: 202614003
Release Date: 4/3/2026
Department of the Treasury
Washington, DC 20224
Third Party Communication: None
Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.03-00,
Person To Contact:
1361.03-02, 1362.00-00,
1362.04-00
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Legend
X = ---
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State = ---
Date 1 = ---
Date 2 = ---
Date 3 = ---
Date 4 = ---
Date 5 = ---
Date 6 = ---
Trust = ---
---
A = ---
---, ID No. ---
Telephone Number:
---
Refer Reply To:
CC:PT&E:B03
PLR-104974-25
Date:
December 30, 2025
PLR-104974-25 2
Dear ---:
This letter responds to a letter dated February 14, 2025, and subsequent correspondence, submitted on behalf of X by its authorized representative, requesting relief under § 1362(f) of the Internal Revenue Code (Code).

# FACTS

According to the information submitted, X was incorporated under the laws of
State and elected to be an S corporation effective Date 1. A, a shareholder of X, transferred shares of X to Trust on Date 2. Trust was treated under subpart E of part I of subchapter J of chapter 1 as owned by A. Thus, Trust was an eligible shareholder of X under § 1361(c)(2)(A)(i). A died on Date 3. Under § 1361(c)(2)(A)(ii), Trust remained an eligible shareholder for a 2-year period beginning on the day of A’s death. Following the expiration of the 2-year period on Date 4, Trust continued to hold shares of X stock.
On Date 5, the beneficiary of Trust died. On Date 6, all the shares of X held by Trust were transferred to two trusts that X represents were eligible shareholders under § 1361(c)(2)(A)(i) at the time of the transfer.
X represents that Trust was eligible to make a Qualified Subchapter S Trust

(QSST) election under § 1361(d) effective Date 4. However, the beneficiary of Trust failed to timely make the QSST election and Trust became an ineligible shareholder of X on Date 4. Accordingly, X’s S corporation election terminated on Date 4.
X represents that X and each of its shareholders have filed all federal tax returns consistently with the treatment of X as an S corporation. X represents that the failure to file the QSST election for Trust was not motivated by tax avoidance or retroactive tax planning. Further, X represents that all income with respect to the stock of X held by the Trust was consistently reported by the beneficiary on the beneficiary’s federal income tax returns as if the QSST election had been effective Date 4. X and its shareholders have agreed to make any adjustments consistent with the treatment of X as an S corporation as may be required by the Secretary.

# 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 such year.
Section 1361(b)(1)(B) defines a “small business corporation,” in part, as a domestic corporation which is not an ineligible corporation and which does 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.
PLR-104974-25 3
Section 1361(c)(2)(A)(i) provides that for purposes of § 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)(ii) provides that for purposes of § 1361(b)(1)(B), a trust which was described in § 1361(c)(2)(A)(i) immediately before the death of the deemed owner and which continues in existence after such death may be an S corporation shareholder, but only for the 2-year period beginning on the day of the deemed owner’s death.
Section 1361(d)(1) provides that in the case of a QSST for which a beneficiary makes an election under § 1361(d)(2), the trust is treated as a trust described in § 1361(c)(2)(A)(i), and for purposes of § 678(a), the beneficiary of the trust shall be treated as the owner of that portion of the trust that consists of stock in an S corporation with respect to which the election under § 1361(d)(2) is made.
Section 1361(d)(2)(A) provides that a beneficiary of a QSST may elect to have
§ 1361(d) apply.
Section 1.1361-1(j)(6)(ii) provides that the current income beneficiary of a QSST must make the election under § 1361(d)(2) by signing and filing with the service center with which the corporation files its income tax returns the applicable form or a statement including the information listed in § 1.1361-1(j)(6)(ii).
Section 1.1361-1(j)(6)(iii) provides, in part, that a QSST election must be filed within the time requirements of § 1.1361-1(j)(6)(iii)(A) through (D).
Section 1.1361-1(j)(6)(iii)(E) provides that if a corporation's S election terminates because of a late QSST election, the corporation may request inadvertent termination relief under§ 1362(f).
Section 1361(d)(3) defines a QSST as a trust, (A) the terms of which require that

(i) during the life of the current income beneficiary, there shall be only one income beneficiary of the trust, (ii) any corpus distributed during the life of the current income beneficiary may be distributed only to such beneficiary, (iii) the income interest of the current income beneficiary in the trust shall terminate on the earlier of such beneficiary's death or the termination of the trust, and (iv) upon the termination of the trust during the life of the current income beneficiary, the trust shall distribute all of its assets to such beneficiary, and (B) all of the income (within the meaning of § 643(b)) of which is distributed (or required to be distributed) currently to one individual who is a citizen or resident of the United States.
PLR-104974-25 4
Section 1362(a)(1) provides that, except as provided in § 1362(g), a small business corporation may elect, in accordance with the provisions of § 1362, to be an S corporation.
Section 1362(d)(2)(A) provides that an election under § 1362(a) will be terminated whenever (at any time on or after the first day of the first 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 terminated under § 1362(d)(2); (2) the Secretary determines that the circumstances resulting in such termination were inadvertent; (3) no later than a reasonable period of time after discovery of the circumstances resulting in such termination, steps were taken so that the corporation for which the termination occurred is a small business corporation; and (4) the corporation for which the termination occurred, and each person who was a shareholder in the corporation at any time during the period specified pursuant to § 1362(f), agrees to make the 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 termination, the corporation shall be treated as an S corporation during the period specified by the Secretary.

# CONCLUSION

Based solely on the facts submitted and representations made, we conclude that
X’s S corporation election terminated on Date 4 when Trust became an ineligible shareholder due to the failure to make a QSST election. We further conclude that the circumstances resulting in the termination of X’s S corporation election were inadvertent within the meaning of § 1362(f).
Accordingly, pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S corporation from Date 4 and thereafter, provided that X’s S corporation election was valid and has not otherwise terminated under § 1362(d).
This ruling is contingent on the legal representative of Trust’s beneficiary filing a
QSST election effective Date 4 within 120 days from the date of this letter with the appropriate service center. A copy of this letter should be attached to the QSST election.
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 and the regulations thereunder. Specifically, we express or imply no opinion regarding X’s eligibility to be an S corporation or Trust’s eligibility to be a QSST.
PLR-104974-25 5
The ruling contained in this letter is 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 requested ruling, it is subject to verification on examination.
This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.
In accordance with a power of attorney on file with this office, we are sending a copy of this letter to X’s authorized representative.
Sincerely,
Elizabeth V. Zanet
Elizabeth V. Zanet
Senior Technician Reviewer, Branch 3
Office of the Associate Chief Counsel
(Passthroughs, Trusts, and Estates)
Enclosure:
Copy of this letter for § 6110 purposes cc: ---
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