IRA stock transfer caused inadvertent S corporation termination

Plain-English summary

A bank holding company's S corporation election terminated when some of its stock was transferred to a shareholder's individual retirement account. The IRA was not a permitted S corporation shareholder for those shares, and the company and its owners did not know the transfer would end S status. After discovering the problem, the IRA distributed the shares to the individual. The IRS ruled that the termination was inadvertent under IRC § 1362(f) and allowed the company to continue as an S corporation. Relief requires corrective returns and adjustments within 120 days, treatment of the shares as distributed on the termination date, and a specified payment by the redacted deadline.

Ruling snapshot

• Question: May the company retain S status after stock was transferred to an ineligible IRA shareholder?
• Outcome: Approved, subject to corrective filings, adjustments, and payment
• Key authorities: IRC §§ 1361(b)(1)(B), 1361(c)(2)(A)(vi), and 1362(f); Rev. Rul. 92-73

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202520002 Third Party Communication: None
Release Date: 5/16/2025 Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.01-02,
1361.03-00, 1362.04-00 Person To Contact:
------------------------, ID No. -----------------
----------------------------------- Telephone Number:
---------------------------- ---------------------
------------------------- Refer Reply To:
------------------------------- CC:PT&E:B01
PLR-111847-24
Date:
RE: ----------------------------------- January 24, 2025

LEGEND

X = ----------------------------------------------------------------------------------------------
---------------------------

Y = ----------------------------------------------------------------------------------------------
-----------------------------

IRA = ----------------------------------------------------------------------------------------------
---------------------------

Date 1 = ---------------------

Date 2 = ---------------------

Date 3 = -----------------------

Date 4 = -------------------------

Date 5 = --------------------------

a = ---------

n = ---------------
PLR-111847-24 2

Dear ---------------:

This responds to your letter, dated June 26, 2024, and subsequent correspondence,
submitted on behalf of X by its authorized representative, requesting a ruling under §
1362(f) of the Internal Revenue Code.

                                     FACTS

The information submitted states that X was incorporated in State on Date 1. X made
an election to be treated as an S corporation effective Date 2. X represents that, at all
times since Date 2, X was a bank (as defined in section 581 of the Code) and a
depository institution holding company (as defined in section 3(w)(1) of the Federal
Deposit Insurance Act (12 U.S.C. 1813(w)(1)). X’s election was inadvertently
terminated on Date 3 because a shares of stock in X were transferred to IRA, an
individual retirement account (IRA) that was created for the benefit of Y and that is an
ineligible shareholder under § 1361(b)(1)(B) and 1361(c)(2)(A)(vi). Neither X nor X’s
shareholders were aware that the transfer of stock to IRA would cause X’s S
corporation election to terminate.

Once X learned of the termination of X’s S corporation election due to the transfer of
stock to an ineligible shareholder on Date 4, IRA distributed the a shares of stock in X to
Y.

X represents that the circumstances resulting in the termination of X’s S corporation
election were inadvertent and were not motivated by tax avoidance or retroactive tax
planning. X represents that it filed consistent with treatment of X as an S corporation
from Date 2 to Date 3. X and its shareholders have agreed to make such adjustments
(consistent with such treatment as an S corporation) as may be required by the
Secretary.

                                       LAW

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) provides that the term “small business corporation” means a
domestic corporation which is not an ineligible corporation and which does not 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.

Section 1361(c)(2)(A)(vi) provides that, in the case of a corporation which is a bank (as
defined in section 581) or a depository institution holding company (as defined in
section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)), a trust
which constitutes an individual retirement account under section 408(a) is a permitted
PLR-111847-24 3

shareholder of an S corporation, but only to the extent of the stock held by such trust in
such bank or company as of October 22, 2004.

Section 1362(d)(2)(A) provides that in general, 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 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)(A) is effective on and after the date of cessation.

Rev. Rul. 92-73, 1992-2 C.B. 224, provides that a trust that qualifies as an IRA under §
408(a) is not a permitted shareholder of an S corporation under § 1361. In addition,
Rev. Rul. 92-73 notes that, when an S corporation inadvertently terminates due to the
transfer of S corporation stock to an IRA, relief may be requested pursuant to § 1362(f).

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
to obtain shareholder consents or was terminated under § 1362(d)(2), (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 election was made or the termination occurred is a small
business corporation or to acquire the required shareholder consents, 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) 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
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 3 when a shares of X’s stock were transferred
to Y’s IRA, an ineligible S corporation shareholder. We conclude, however, that the
termination described in this paragraph was inadvertent within the meaning of § 1362(f).
Therefore, X will be treated as an S corporation effective Date 3 and thereafter,
provided that its S corporation election was otherwise valid and has not terminated
under § 1362(d) other than as discussed in this letter.

This letter is contingent on, within 120 days of the date of this letter, X, Y, and IRA filing
with the appropriate service center any original or amended returns for the taxable year
including Date 3 and all subsequent years and making adjustments to properly reflect
PLR-111847-24 4

the treatment of the a shares as if IRA distributed the a shares to Y on Date 3. A copy
of this letter should be attached to each return.

Furthermore, as an adjustment under § 1362(f)(4), a payment of $n and a copy of this
letter must be sent to the following address:

Internal Revenue Service
Kansas City Service Center
333 W. Pershing Road
Kansas City, MO 64108
Stop 7777
Attn: Manual Deposit

This payment and a copy of this letter must be sent no later than Date 5.

If the condition are not met, this ruling is null and void. In addition, if these conditions
are not met, X must notify the service center with which it filed its S corporation election
that its election terminated on Date 3.

Except for the specific ruling 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. In particular, we express or imply no opinion regarding X’s eligibility to be an S
corporation.

The ruling contained in this letter is based on information and representations submitted
by the taxpayer and accompanied by a penalty of perjury statement executed by the
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 representatives.

                                   Sincerely,


                                   ________________________________________
                                   Laura Fields, Chief
                                   Branch 1
                                   Office of the Associate Chief Counsel
                                   (Passthroughs, Trusts, and Estates)

PLR-111847-24 5

Encl:
Copy for § 6110 purposes

cc: -----------------------------------
---------------------------------------
----------

    -------------------------------
    ---------------------------
    ---------------------------------------
    ---------------------------