Inadvertent Terminations

Internal Revenue Service
Number: 202618004
Release Date: 5/1/2026
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 = ---
---, ID No. ---
Telephone Number:
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Refer Reply To:
CC:PT&E:B03
PLR-112694-25
Date:
January 27, 2026
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Trust 1 =
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Trust 2 =
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Trust 3 =
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A = ---
PLR-112694-25 2
Dear ---:
This letter responds to a letter dated June 10, 2025, and subsequent correspondence, submitted on behalf of X by X’s 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 1 on Date 2. Trust 1 was treated under subpart E of part I of subchapter J of chapter 1 of the Code as owned by A. Thus, Trust 1 was an eligible shareholder of X under § 1361(c)(2)(A)(i). A died on Date 3. Under § 1361(c)(2)(A)(ii), Trust 1 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 1 continued to hold shares of X stock. On Date 5, all the shares of X were transferred in certain proportion to Trust 2 and Trust 3.
X represents that Trust 1 was eligible to make a Qualified Subchapter S Trust

(QSST) election under § 1361(d) effective Date 4. X also represents that Trust 2 and
Trust 3 were eligible to make QSST elections under § 1361(d) effective Date 5.
However, the beneficiary of Trust 1, Trust 2, and Trust 3 failed to make timely QSST elections for the trusts to be eligible S corporation shareholders. Thus, Trust 1 became an ineligible shareholder of X on Date 4, and Trust 2 and Trust 3 became ineligible shareholders of X on Date 5. Accordingly, the failure to make a QSST election caused X’s S corporation election to terminate on Date 4.
X represents that X and its shareholders have filed all federal income tax returns consistently with the treatment of X as an S corporation. Further, X represents that all income with respect to the stock of X held by Trust 1, Trust 2 and Trust 3 was consistently reported by the beneficiary of each trust on the beneficiary’s federal income tax returns as if the QSST elections had been in effect for Date 4 and Date 5. 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) 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 PLR-112694-25 3 an individual, (C) have a nonresident alien as a shareholder, and (D) have more than one class of stock.
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-112694-25 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(d)(2)(B) provides that any termination under § 1362(d)(2) shall be effective on and after the date of cessation.
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 1 became an ineligible shareholder due to the failure to make a timely QSST election and would have terminated on Date 5 when Trust 2 and Trust 3 became ineligible shareholders of X for the same reason, if it had not already terminated on Date 4. 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 effective Date 4 and thereafter, provided that X’s S corporation election was valid and has not otherwise terminated under § 1362(d) for reasons not addressed in this letter. Further, Trust 1, will be treated as a QSST from Date 4, and Trust 2 and Trust 3 will be treated as QSSTs from Date 5, provided that the trusts meet the requirements of § 1361(d)(3).
This ruling is contingent on the beneficiary of the trusts filing within 120 days from the date of this letter a QSST elections for Trust 1 effective Date 4, and for Trust 2 and Trust 3 effective Date 5 with the appropriate service center. A copy of this letter should be attached to each QSST election.
PLR-112694-25 5
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 the eligibility of Trust 1, Trust 2 and Trust 3 to be QSSTs.
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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