Corporation received relief for ineffective S and QSub elections

Plain-English summary

A corporation's S election was filed for a date before its first taxable year and was therefore ineffective, which also made several qualified subchapter S subsidiary elections ineffective. Separate trust shares and later trusts also held stock without timely qualified subchapter S trust elections, creating additional potential terminations. The corporate group later completed a transaction represented to be an F reorganization and continued filing consistently with S corporation treatment. The IRS found that the ineffective elections and potential terminations were inadvertent and granted relief under IRC § 1362(f). The relief treats the corporations and subsidiaries as S corporations or QSubs for the specified periods, subject to otherwise valid elections and the filing of two required QSST elections within 120 days.

Ruling snapshot

• Question: Could the corporation and its subsidiaries retain intended S corporation and QSub treatment despite ineffective elections and missing QSST elections?
• Outcome: Approved
• Key authorities: IRC §§ 1361, 1362(f), and 368(a)(1)(F); Treas. Reg. §§ 1.1361-1, 1.1361-3, and 1.1362-6; Rev. Rul. 64-250; Rev. Rul. 2008-18

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202529002 Third Party Communication: None
Release Date: 7/18/2025 Date of Communication: Not Applicable
Index Numbers: 1362.00-00, 1362.04-00
Person To Contact:
------------------------------------ --------------------, ID No. -----------------
---------------------------------------- Telephone Number:
------------------------- ---------------------
------------------------------- Refer Reply To:
CC:PT&E:B03
PLR-119294-24
Date:
April 21, 2025

LEGEND

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

Sub 1 = ---------------------------------------------------------------

Sub 2 = ---------------------------------------------------------

Sub 3 = ----------------------

Trust 1 = ---------------------------------------------

Trust 2 = ---------------------------------------------------------------

Trust 3 = -----------------------------------------------------------------

PLR-119294-24 2

Trust 4 = ----------------------------------------------

A = -----------------

B = -------------------

C = ---------------------

State 1 = ---------

State 2 = -------------

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

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

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

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

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

Date 6 = ----------------------

Date 7 = ---------------------------

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

    This letter responds to a letter dated October 17, 2024, and subsequent

correspondence, submitted on behalf of X by its authorized representative, requesting
relief under § 1362(f) of the Internal Revenue Code (Code).

                                                 FACTS

   The information submitted states that X was incorporated under the laws of State

1 on Date 2. X elected to be an S corporation effective Date 1, a date that preceded X’s
taxable year beginning on Date 2. Consequently, X’s S corporation election was
ineffective.

   Also on Date 2, Sub1 and Sub2 were incorporated under the laws of State 2. X

wholly owned Sub1 and Sub2. X elected to treat Sub1 and Sub2 as qualified
subchapter S subsidiaries (QSubs) under § 1361(b)(3) effective Date 2 and Date 4,

PLR-119294-24 3

respectively. Because X’s S corporation election was ineffective, its elections treating
Sub1 and Sub2 as QSubs were also ineffective.

    X represents that prior to Date 3, Trust 1 was an eligible S corporation

shareholder under § 1361(c)(2). As of Date 3, X represents that separate shares of
Trust 1 were created for the benefit of A and B and that the separate shares of Trust 1
for the benefit of A and B satisfied the qualified subchapter S trust (QSST) requirements
under § 1361(d)(3). However, A and B, the income beneficiaries of the separate shares
of Trust 1, failed to make an election under § 1361(d)(2) to treat each of their separate
shares of Trust 1 as a QSST effective Date 3. Therefore, had X’s S corporation election
been effective, it would have terminated on Date 3.

   On Date 4, Trust 1 transferred its shares of X stock to Trust 2 for the benefit of A

and to Trust 3 for the benefit of B. After the transfer, Trust 1 no longer held any shares
of X stock. X represents that Trust 2 and Trust 3 satisfied the QSST requirements
under § 1361(d)(3). However, A and B, the income beneficiaries of Trust 2 and Trust 3,
respectively, failed to make QSST elections with respect to X for Trust 2 and Trust 3,
respectively, effective Date 4. Therefore, X’s S corporation election would have
terminated on Date 4, had its election been effective or not previously terminated.

   On Date 5, X and Sub2 merged with and into Sub1 with Sub1 surviving. X

represents that the merger was intended to be a reorganization under § 368(a)(1)(F)
and resulted in X’s S corporation election continuing for Sub1 under Rev. Rul. 64-250,
1964-2 C.B. 333, and Rev. Rul. 2008-18, 2008-1 C.B. 674. On Date 6, Sub3, a State 1
corporation, became a wholly owned subsidiary of Sub1. Sub1 elected to treat Sub3 as
a QSub under § 1361(b)(3) effective Date 6. Because X’s S corporation election was
ineffective, Sub1 was not a valid S corporation. Therefore, Sub1’s election treating
Sub3 as a QSub was ineffective.

    Also on Date 6, Trust 4 became a shareholder of Sub1. It is represented that

Trust 4 satisfied the QSST requirements under § 1361(d)(3). However, C, the income
beneficiary of Trust 4, failed to make a QSST election with respect to Sub1 for Trust 4
effective Date 6. Therefore, Sub1’s S corporation election would have terminated on
Date 6, had Sub1 been a valid S corporation. As of Date 7, Trust 4 no longer owned
any shares of Sub1 stock.

   X represents that the circumstances resulting in its ineffective S corporation

election and the resulting ineffective QSub elections and the subsequent termination of
its S corporation election, including Sub1’s S corporation election, were inadvertent and
were not motivated by tax avoidance or retroactive tax planning. X, Sub1, and their
shareholders have filed tax returns consistent with X being an S corporation effective
Date 2 and Sub1 being an S corporation following the reorganization on Date 5. X,
Sub1, and their shareholders agree to make any adjustments consistent with the
treatment of X and Sub1 as S corporations as may be required by the Secretary.

PLR-119294-24 4

                               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) provides that the term “small business corporation” means

a domestic corporation that is not an ineligible corporation and that does not, among
other requirements, 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(b)(3)(A) provides that, except as provided in regulations prescribed

by the Secretary, for purposes of the Code (i) a corporation which is a QSub shall not
be treated as a separate corporation, and (ii) all assets, liabilities, and items of income,
deduction, and credit of a QSub shall be treated as assets, liabilities, and such items (as
the case may be) of the S corporation.

  Section 1361(b)(3)(B) provides that the term “QSub” means any domestic

corporation which is not an ineligible corporation (as defined in § 1361(b)(2)), if (i) 100
percent of the stock of such corporation is held by the S corporation, and (ii) the S
corporation elects to treat such corporation as a QSub.

    Section 1.1361-3(a)(1) of the Income Tax Regulations provides that the

corporation for which a QSub election is made must meet all the requirements of
§ 1361(b)(3)(B) at the time the election is made and for all periods for which the election
is to be effective.

   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 of the Code)
as owned by an individual who is a citizen or resident of the United States may be a
shareholder.

   Section 1361(d)(1) provides that in the case of a QSST with respect to 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 such
trust shall be treated as the owner of that portion of the trust which 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)(1)
apply.

    Section 1361(d)(3) provides that the term “qualified subchapter S trust” means a

trust — (A) the terms of which require that — (i) during the life of the current income
beneficiary, there shall only be one income beneficiary of the trust, (ii) any corpus
distributed during the life of the current income beneficiary may be distributed only to

PLR-119294-24 5

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 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 a resident of the United States.

  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 S corporation files its income tax return, the applicable form including the
information listed in § 1.1361-1(j)(6)(ii).

  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.

  An S corporation election effective for a taxable year immediately preceding the

corporation’s first taxable year is not valid. See § 1.1362-6(a)(2)(iii), Example 1.

    Section 1362(d)(2)(A) provides that an election under § 1362(a) is 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.

    Section 1362(f) provides that if (1) an election under § 1362(a) or

§ 1361(b)(3)(B)(ii) by any corporation (i) 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 (ii) 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 election was made or the termination occurred is a small business corporation or a
QSub, as the case may be, 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 the corporation at any time during the period specified
pursuant to § 1362(f), agree to make the adjustments (consistent with the treatment of
the corporation as an S corporation or a QSub, 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, the corporation shall be treated as an S
corporation or a QSub, as the case may be, during the period specified by the
Secretary.

PLR-119294-24 6

    Rev. Rul. 2008-18, situation 2, holds that consistent with Rev. Rul. 64-250, a

reorganization under § 368(a)(1)(F) does not terminate an S corporation election under
§ 1362. In Rev. Rul. 2008-18, C, an individual owned all of the stock of Z, an S
corporation. In Year 1, Z formed Newco, which in turn forms Mergeco. Pursuant to a
plan of reorganization, Mergeco merges with and into Z, with Z surviving and C
receiving solely Newco stock in exchange for Z stock. Newco meets the requirements
for qualification as a small business corporation and timely elects to treat Z as a QSub,
effective immediately following the transaction. The transaction met the requirements of
a reorganization under § 368(a)(1)(F) and Z’s original S corporation election continued
for Newco. Newco must obtain a new employer identification number (EIN). Z must
retain its EIN even though a QSub election is made for Z and must use its original EIN
any time the QSub is otherwise treated as a separate entity for federal tax purposes
(including for employment and certain excise taxes) or if the QSub election terminates.

  Rev. Rul. 64-250 provides that when an S corporation merges into a newly

formed corporation in a transaction qualifying as a reorganization under § 368(a)(1)(F)
and the newly formed surviving corporation also meets the requirements of an S
corporation, the reorganization does not terminate the S corporation election. Thus, the
S corporation election remains in effect for the new corporation.

                                  CONCLUSION

   Based on the facts submitted and the representations made, we conclude that X’s

S corporation election was ineffective as of Date 1 and consequently the QSub
elections for Sub1, Sub2, and Sub3 were also ineffective. We also conclude that had
X’s S corporation election been effective, its S corporation election would have
terminated on Date 3 and Date 4 when it had ineligible S corporation shareholders and
Sub1’s S corporation election following the represented § 368(a)(1)(F) reorganization
would have terminated on Date 6 when it had an ineligible S corporation shareholder.
However, we conclude that the circumstances resulting in the ineffectiveness of X’s S
corporation election and the QSub elections for Sub1, Sub2, and Sub3 and in the
termination of X’s and Sub1’s S corporation elections were inadvertent within the
meaning of § 1362(f). Therefore, under § 1362(f), (1) X will be treated as an S
corporation from Date 2 and thereafter, provided that X’s S corporation election was
otherwise valid and has not otherwise terminated under § 1362(d) for reasons not
addressed in this letter, (2) Sub2 will continue to be treated as an S corporation from
Date 6 and thereafter, provided that its S corporation election has not otherwise
terminated under § 1362(d) for reasons not addressed in this letter, and (3) Sub1 will be
treated as a QSub effective Date 2 and thereafter, Sub2 will be treated as a QSub
effective Date 4 and thereafter, and Sub3 will be treated as a QSub effective Date 6 and
thereafter, provided the QSub elections for Sub1, Sub2, and Sub3 were otherwise valid
under § 1361(b)(3)(B) and have not otherwise terminated under § 1361(b)(3)(C).

  This ruling is contingent on each of A and B, the income beneficiaries of Trust 2

and Trust 3, respectively, filing a QSST election for their respective trusts effective Date

PLR-119294-24 7

4 with the appropriate service center within 120 days of the date of this letter. A copy of
this letter should be attached to each QSST election.

   Except as specifically ruled above, we express or imply no opinion concerning the

federal tax consequences of the facts described above under any other provision of the
Code. Specifically, we express or imply no opinion regarding whether X and Sub1 were
otherwise valid S corporations, whether Sub1, Sub2, and Sub3 were otherwise valid
QSubs, whether the separate shares of Trust 1 were valid QSSTs, and whether Trust 2,
Trust 3, and Trust 4 were valid QSSTs. Further, we express or imply no opinion on the
validity of the reorganization under § 368(a)(1)(F) and its tax consequences.

 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 to your authorized representative.

  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.

                                                Sincerely,



                                                Mary Beth Carchia
                                                Senior Technician Reviewer, Branch 3
                                                Office of Associate Chief Counsel
                                                (Passthroughs, Trusts, and Estates)

Enclosure:
Copy of this letter for § 6110 purposes

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

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