Corporation receives inadvertent-invalid-election relief

Plain-English summary

A corporation attempted to elect S corporation status while it was wholly owned by a partnership, an ineligible S corporation shareholder, and its shareholders had not consented to the election. The partnership's owners were two individuals, directly or through grantor trusts, and one individual later became the corporation's sole owner after the partnership liquidated. The IRS found the election's ineffectiveness inadvertent under IRC § 1362(f). It ruled that the corporation would be treated as an S corporation from the intended date, with the two individuals treated as proportionately owning its shares until the liquidation and the remaining individual treated as owning all shares afterward. The relief depends on the corporation and its shareholders filing all required open-year returns consistently within 120 days, and the IRS did not decide whether the corporation otherwise qualified for S status.

Ruling snapshot

• Question: Can the corporation retain S status even though a partnership owned it and the required shareholders did not consent when the election was made?
• Outcome: Approved as an inadvertent ineffective election, subject to consistent filings within 120 days
• Key authorities: IRC §§ 1361(a), 1361(b)(1)(B), 1361(c)(2)(A)(i), 1362(a), 1362(f); Treas. Reg. § 1.1362-6(a)(2)(i)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202538001 Third Party Communication: None
Release Date: 9/19/2025 Date of Communication: Not Applicable
Index Numbers: 1362.00-00, 1362.01-00,
1362.04-00 Person To Contact:
----------------------, ID No. -----------------
----------------------------------------------------------- Telephone Number:
-------------------------------- --------------------
------------------ Refer Reply To:
------------------------- CC:PTE:B3
--------------------------------- PLR-100848-25
Date:
June 24, 2025

                                       LEGEND

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

Partnership = -----------------------------------------

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

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

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

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

State = ------------

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

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

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

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

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

This letter responds to a letter dated January 3, 2025, 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).

                                        FACTS

The information submitted states that X was incorporated under the laws of State
on Date 1 and elected to be an S corporation effective Date 2. On Date 2, Partnership,
a State limited partnership classified as a partnership for federal tax purposes, wholly
owned X. Moreover, none of X’s shareholders consented to X’s S corporation election.
Instead, B, a partner in Partnership, signed a statement consenting to X’s S corporation
election as specified on Form 2553, Election by a Small Business Corporation.
Accordingly, X’s S corporation election was ineffective on Date 2 because Partnership
was an ineligible S corporation shareholder under § 1361(b)(1)(B) and none of X’s
shareholders on Date 2 consented to X’s S corporation election.

On Date 2, Partnership was owned by Trust 1 and B. X represents that Trust 1
was a grantor trust described in § 1361(c)(2)(A)(i), of which A was the deemed owner,
and, thus, was an eligible S corporation shareholder. On Date 3, B transferred its limited
partnership interest in Partnership to Trust 2, a trust which X represents was a grantor
trust described in § 1361(c)(2)(A)(i), of which B was the deemed owner, and, thus, was
an eligible S corporation shareholder. Pursuant to a settlement agreement between A
and B, Partnership dissolved and liquidated, and B became the sole owner of X as of
Date 4.

X represents that the circumstances resulting in its ineffective S corporation
election were inadvertent and were not motivated by tax avoidance or retroactive tax
planning. Additionally, X represents that X and its shareholders have filed federal tax
returns consistent with being an S corporation effective Date 2. Finally, X and its
shareholders agree to make any adjustments required by the Secretary consistent with
the treatment of X as an S corporation.

                              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 which is not an ineligible corporation and which does not, among
other requirements, have as a shareholder a person (other than an estate, a trust

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described in § 1361(c)(2), or an organization described in § 1361(c)(6)) who is not an
individual.

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 1 of subchapter J of chapter 1) as owned by
an individual who is a citizen or resident of the United States, is an eligible S corporation
shareholder.

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(a)(2) provides that an election to be an S corporation shall be valid
only if all persons who are shareholders in such corporation on the day on which such
election is made consent to such election.

Section 1.1362-6(a)(2)(i) of the Income Tax Regulations provides that the
election to be an S corporation is not valid unless all shareholders of the corporation at
the time of the election consent to the election in the manner provided in § 1.1362-6(b).

Section 1362(f) provides, in 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 § 1361(b)(2)) by reason of a failure to meet the requirements of § 1361(b) or
to obtain shareholder consents, (2) the Secretary determines that the circumstances
resulting in such ineffectiveness were inadvertent; (3) no later than a reasonable period
of time after discovery of the circumstances resulting in such ineffectiveness, steps
were taken so that the corporation for which the election was made is a small business
corporation, and (4) the corporation for which the election was made, and each person
who was a shareholder in such corporation at any time during the period specified
pursuant to § 1362(f), agrees to make such 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, such corporation shall be treated as an S corporation during the period
specified by the Secretary.

                                  CONCLUSION

Based solely on the information submitted and the representations made,
we conclude that X’s S corporation election was ineffective on Date 2, because
Partnership was an ineligible S corporation shareholder and none of X’s shareholders
on Date 2 consented to X’s S corporation election. We conclude, however, that the
circumstances resulting in the ineffectiveness of X’s S corporation election were
inadvertent within the meaning of § 1362(f). Accordingly, under § 1362(f), (i) X will be
treated as an S corporation from Date 2 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; (ii) A and B will be treated as owning the shares of X stock that

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Partnership owned from Date 2 up to, but not including, Date 4 in proportion to their
ownership interests in Partnership from Date 2 up to, but not including, Date 4; and (iii)
B will be treated as owning all the shares of X from Date 4 and thereafter.

This ruling is contingent on X and its shareholders filing, within 120 days from the
date of this letter, all required federal income tax returns (including amended returns) for
all open years consistent with A and B owning the shares of X stock, as described
above.

Except as expressly provided herein, 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 whether X is 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 requested ruling, 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 to X's authorized representative.

                                   Sincerely,




                                   Brian J. Barrett
                                   Senior Technician Reviewer, Branch 3
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosure:
Copy of this letter for § 6110 purposes

PLR-100848-25 5

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

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