Eligible v. Ineligible

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202635007
Release Date: 8/28/2026
Index Numbers: 1362.00-00, 1362.01-00
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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:B03
PLR-119903-25
Date:
May 29, 2026
LEGEND
X = ---
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Y = ---
State = ---

Dear ---:
This letter responds to a letter dated November 18, 2025, and subsequent correspondence, submitted on behalf of X, by its authorized representative, requesting inadvertent termination relief under § 1362(f) of the Internal Revenue Code (Code).

# FACTS

According to the information submitted, X was incorporated on Date 1, under the laws of State. X elected S corporation status effective Date 2. However, X had an ineligible shareholder Y that owned a second class of X stock on Date 2, causing X’s S corporation election to be ineffective. On Date 3, X converted to a single class of stock and redeemed all the stock held by Y.
PLR-119903-25 2
X represents that the invalid S corporation election was inadvertent and was not motivated by tax avoidance or retroactive tax planning, and that and its shareholders consistently treated X as being an S corporation from Date 2. Further, X and its shareholders agree to make any adjustments required as a condition of obtaining relief for the invalidity of X's election as provided under § 1362(f) that may be required by the Secretary.

# LAW

Section 1362(a) of the Code 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 1361(a)(1) defines an “S corporation” as a small business corporation for which an election under § 1362(a) is in effect for the taxable 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 one class of stock.
Section 1.1361-1(1)(1) provides, in part, 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(1)(2)(i) provides 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 laws, and binding agreements relating to distribution and liquidation proceeds (collectively, governing provisions).
Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated whenever (at any time on or after the first day of the first taxable year for which a corporation is an S corporation) such corporation ceases to be a small business corporation. Section 1362(d)(2)(B) provides that the termination shall be effective on and after the date of cessation.
Section 1362(f) provides, in pertinent 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 terminated under § 1362(d)(2) or (3), (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 event resulting in the PLR-119903-25 3 ineffectiveness or termination, steps were taken (A) so that the corporation for which the election was made or the termination occurred is a small business corporation, and (4) the corporation, 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 such ineffectiveness or 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 the representations made, we conclude that X's S corporation election was ineffective because of the invalid shareholder and the second class of stock. However, we also conclude that the ineffectiveness of X's S corporation election was inadvertent within the meaning of § 1362(f). Pursuant to the provisions of § 1362(f), X will be treated as an S corporation from Date 2, provided X's S corporation election was otherwise effective and not terminated under § 1362(d).
Except as specifically set forth above, we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the Internal Revenue Code. Specifically, we express or imply no opinion regarding whether X was otherwise eligible to be an S corporation.
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 ruling request, it is subject to verification on examination.
This ruling is directed only to the taxpayer requesting 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 ruling to your authorized representative.
Sincerely,
____
Richard T. Probst
Senior Technician Reviewer, Branch 3
Office of the Associate Chief Counsel
(Passthroughs, Trusts, and Estates)
PLR-119903-25 4
Enclosure:
Copy of this letter for § 6110 purposes cc: ---
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