Late trust elections receive inadvertent S corporation relief

Plain-English summary

A corporation intended to elect S corporation status and to treat four subsidiaries as qualified subchapter S subsidiaries. Multiple shareholder trusts qualified to be electing small business trusts, but their trustees did not timely file the required ESBT elections, making the corporation's S election and its subsidiary elections ineffective and creating later potential terminations when two more trusts acquired shares. The IRS found both the initial ineffectiveness and the later termination circumstances inadvertent under IRC § 1362(f). It ruled that the corporation and subsidiaries would be treated as an S corporation and QSubs from the intended effective date, subject to their otherwise being eligible and the elections not otherwise terminating. The relief requires the specified trustees to file corrective ESBT elections with the appropriate service center within 120 days and attach a copy of the ruling.

Ruling snapshot

• Question: Can the corporation and its four subsidiaries obtain inadvertent-election relief after shareholder trusts failed to file timely ESBT elections?
• Outcome: Approved, conditioned on corrective ESBT filings within 120 days and continued eligibility for S corporation and QSub status
• Key authorities: IRC §§ 1361, 1362(f); Treas. Reg. §§ 1.1361-1(m), 1.1361-3(a)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202535010
Third Party Communication: None
Release Date: 8/29/2025
Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.03-00,
1361.03-03, 1361.05-00, Person To Contact:
1362.00-00, 1362.02-00, --------------------, ID No. -----------------
1362.04-00 Telephone Number:
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------------------------------------------------ Refer Reply To:
------------------------------------ CC:PT&E:B01
------------------ PLR-122229-24
------------------------------ Date:
May 28, 2025

                                               LEGEND

X = ---------------------------------------------------------------------------------
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Sub 1 = ---------------------------------------------------------------------------------
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Sub 2 = ---------------------------------------------------------------------------------
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Sub 3 = ---------------------------------------------------------------------------------
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Sub 4 = ---------------------------------------------------------------------------------
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Trust 1 = ---------------------------------------------------------------------------------
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Trust 2 = ---------------------------------------------------------------------------------
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Trust 3 = ---------------------------------------------------------------------------------
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Trust 4 = ---------------------------------------------------------------------------------
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PLR-122229-24 2

Trust 5 = ---------------------------------------------------------------------------------
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Trust 6 = ---------------------------------------------------------------------------------
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Trust 7 = ---------------------------------------------------------------------------------
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Trust 8 = ---------------------------------------------------------------------------------
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Trust 9 = ---------------------------------------------------------------------------------
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Trust 10 = ---------------------------------------------------------------------------------
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Trust 11 = ---------------------------------------------------------------------------------
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Trust 12 = ---------------------------------------------------------------------------------
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Trust 13 = ---------------------------------------------------------------------------------
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Trust 14 = ---------------------------------------------------------------------------------
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State = --------

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

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

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

Year = -------

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

This letter responds to a letter dated December 10, 2024, and subsequent
correspondence, submitted on behalf of X by X’s authorized representative, requesting
a ruling under § 1362(f) of the Internal Revenue Code (Code).
PLR-122229-24 3

                                      FACTS

The information submitted states that X was incorporated under the laws of State in
Year. X filed an election to be treated as an S corporation effective Date 1. In addition,
X filed elections to treat each of Sub 1, Sub 2, Sub 3, and Sub 4 as a Qualified
Subchapter S Subsidiary (“QSub”) effective Date 1.

Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust 7, Trust 8, Trust 9, Trust 10,
Trust 11, and Trust 12 (collectively “Trusts 1-12”) held shares of X stock on Date 1. X
represents that Trusts 1-12 each met the requirements of an Electing Small Business
Trust (ESBT) within the meaning of § 1361(e)(1)(A), except that the trustees of each of
Trusts 1-12 failed to file elections under § 1361(e)(3) for each respective trust to be an
ESBT effective Date 1. Consequently, Trusts 1-12 were ineligible shareholders of X
and X's S corporation election and X’s QSub elections for Sub 1, Sub 2, Sub 3, and Sub
4 were all ineffective.

Furthermore, on Date 2, Trust 13 acquired shares of X stock and, on Date 3, Trust 14
acquired shares of X stock. X represents that Trust 13 and Trust 14 met the
requirements to be ESBTs within the meaning of § 1361(e)(1)(A), except that the
trustees of Trust 13 and Trust 14 failed to file elections under § 1361(e)(3) for the trusts
to be treated as ESBTs effective Date 2 and Date 3, respectively. Consequently, Trust
13 and Trust 14 were ineligible shareholders of X and X's S corporation status and X’s
QSub elections for Sub 1, Sub 2, Sub 3, and Sub 4 would have terminated on Date 2 or
Date 3, had the elections not been ineffective on Date 1.

X represents that it intended to make a valid S corporation election effective Date 1 and
that the ineffectiveness of the election was inadvertent and not motivated by tax
avoidance or retroactive tax planning. X further represents that the circumstances that
would have resulted in the termination of X's S corporation election had X’s S
corporation been effective were not motived by tax avoidance or retroactive tax planning
considerations. X additionally represents that for each taxable year since X elected to
be an S corporation, X and its shareholders have filed their federal income tax returns
consistent with having a valid S corporation election in effect for X. In particular, X
represents that Trusts 1-12, Trust 13, and Trust 14 have filed federal income tax returns
consistent with having a valid ESBT elections in effect during all relevant taxable years.
Further, X and its shareholders have agreed to make any adjustments consistent with
the treatment of X as an S corporation or Sub 1, Sub 2, Sub 2, and Sub 4 as QSubs as
may be required by the Secretary with respect to the period specified by § 1362(f).

                                       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.
PLR-122229-24 4

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 1
class of stock.

Section 1361(b)(3)(A) provides that, except as provided in regulations prescribed by the
Secretary and for purposes of the Code, a corporation which is a QSub shall not be
treated as a separate corporation, and 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 1361(c)(2)(A)(v) provides that, for purposes of § 1361(b)(1)(B), an ESBT may
be an S corporation shareholder.

Section 1361(e)(1)(A) provides that an ESBT means any trust if (i) such trust does not
have as a beneficiary any person other than (I) an individual, (II) an estate, (III) an
organization described in § 170(c)(2), (3), (4), or (5), or (IV) an organization described in
§ 170(c)(1) which holds a contingent interest in such trust and is not a potential current
beneficiary, (ii) no interest in such trust was acquired by purchase, and (iii) an election
under § 1361(e) applies to such trust.

Section 1361(e)(3) provides that an election under § 1361(e) shall be made by the
trustee. Any such election shall apply to the taxable year of the trust for which made
and all subsequent taxable years of such trust unless revoked with the consent of the
Secretary.

Section 1.1361-1(m)(2)(i) of the Income Tax Regulations provides, in relevant part, that
the trustee of the trust must make the ESBT election by signing and filing, with the
service center where the S corporation files its income tax return, a statement that
meets the requirements of § 1.1361-1(m)(2)(ii). Generally, only one ESBT election is
made for the trust, regardless of the number of S corporations whose stock is held by
the ESBT. However, if the ESBT holds stock in multiple S corporations that file in
different service centers, the ESBT election must be filed with all the relevant service
centers where the corporations file their income tax returns. This requirement applies
only at the time of the initial ESBT election; if the ESBT later acquires stock in an S
corporation which files its income tax return at a different service center, a new ESBT
election is not required.
PLR-122229-24 5

Section 1.1361-1(m)(2)(iii) provides that the trustee of an ESBT must file the ESBT
election within the time requirements prescribed in § 1.1361-1(j)(6)(iii) for filing a QSST
election (generally within the 16-day-and-2-month period beginning on the day that the
stock is transferred to the trust).

Section 1.1361-3(a)(1) 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 1362(a) 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) provides that an S corporation election 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) or
§ 1361(b)(2)(B)(ii) 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 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
termination occurred is a small business corporation or QSub, as the case may be; and
(4) the corporation for which the election was made or 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 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, such corporation shall be
treated as an S corporation or QSub, as the case may be, 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 on Date 1 as a result of the failure to make timely
ESBT elections for Trusts 1-12. We also conclude that had X's S corporation election
been effective, X’s election would have subsequently terminated on Date 2 when Trust
13 became a shareholder and Date 3 when Trust 14 became a shareholder. We further
conclude that X’s QSub elections for Sub 1, Sub 2, Sub 3, and Sub 4 were ineffective
on Date 1 and would have subsequently terminated on Date 2 and Date 3 because of
the ineffectiveness and terminations of X’s election to be an S corporation.
PLR-122229-24 6

We conclude that the circumstances resulting in the ineffectiveness of X's S corporation
election and corresponding ineffectiveness of X’s QSub elections for Sub 1, Sub 2, Sub
3, and Sub 4 were inadvertent within the meaning of § 1362(f). We further conclude
that the circumstances surrounding the subsequent terminations of X's S corporation
election and the QSub elections for Sub 1, Sub 2, Sub 3, and Sub 4 had X’s S
corporation election been effective were inadvertent within the meaning of § 1362(f).

Pursuant to the provisions of § 1362(f), X will be treated as an S corporation from Date
1 and thereafter, and Sub 1, Sub 2, Sub 3, and Sub 4 will be treated as QSubs from
Date 1 and thereafter, provided X's S corporation election was otherwise valid and has
not otherwise terminated under § 1362(d) and Sub 1, Sub 2, Sub 3, and Sub 4 were
otherwise eligible to be treated as QSubs, and provided the following conditions are
met. No later than 120 days from the date of this letter: (1) the trustees of Trust 1,
Trust 2, Trust 3, Trust 4, Trust 5, Trust 6, Trust 7, Trust 8, Trust 9, Trust 10, and Trust
11 filing an ESBT election for each of Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, Trust 6,
Trust 7, Trust 8, Trust 9, Trust 10, and Trust 11 effective Date 1, (2) the trustee of Trust
13 filing an ESBT election for Trust 13 effective Date 2, and (3) the trustee of Trust 14
filing an ESBT election for Trust 14 effective Date 3. The elections must be made with
the appropriate service center and a copy of this letter should be attached to each
ESBT election.

Except as expressly provided herein, we express or imply no opinion concerning the tax
consequences of any aspect of any transaction or item discussed or referenced in this
letter. Specifically, we express or imply no opinion regarding (i) X’s eligibility to be an S
corporation, (ii) whether Trusts 1-12, Trust 13, or Trust 14 are eligible to be ESBTs, or
(iii) whether Sub 1, Sub 2, Sub 3, or Sub 4 are eligible to be QSubs.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayers 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 rulings, it is subject to verification on examination.

These rulings are directed only to the taxpayers requesting them. Section 6110(k)(3) of
the Code provides that they 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 Taxpayers' authorized representative.
PLR-122229-24 7

                                              Sincerely,




                                              ______________________________
                                              Caroline E. Hay
                                              Senior Technician Reviewer, Branch 1
                                              Office of the Associate Chief Counsel
                                              (Passthroughs, Trusts, and Estates)

Enclosure (1)
Copy for § 6110 purposes

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