S corporation received relief for ineligible voting trust

Plain-English summary

Two electing small business trusts transferred their S corporation shares to a new trust intended to qualify as a voting trust. The new trust did not initially meet the requirements for an eligible S corporation shareholder, which terminated the corporation's S election. After discovering the problem, the trustees amended the voting trust agreement so the trust would qualify. The IRS accepted the corporation's representations that the termination was inadvertent, was not motivated by tax avoidance or retroactive planning, and was followed by consistent tax reporting. It ruled that the corporation would continue to be treated as an S corporation and the trust as a qualified voting trust from the transfer date forward, provided the S election was otherwise valid.

Ruling snapshot

• Question: Could an S corporation obtain inadvertent-termination relief after shares were transferred to an initially ineligible voting trust?
• Outcome: Approved, subject to the S election otherwise remaining effective
• Key authorities: IRC §§ 1361(c)(2), 1362(d)(2), 1362(f); Treas. Reg. § 1.1361-1(h)(1)(v)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202539009 Third Party Communication: None
Release Date: 9/26/2025 Date of Communication: Not Applicable
Index Number: 1362.04-00, 1361.03-00
Person To Contact:
-------------------------------- -------------------------, ID No. -----------------
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-------------------- Telephone Number:
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--------------------------------------------------------- Refer Reply To:
CC:PT&E:B01
In Re: Private Letter Ruling Request PLR-105309-25
Date:
June 27, 2025

                                               LEGEND

X = ----------------------------------------------------
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Trust 1 = ----------------------------------------------------
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Trust 2 = ----------------------------------------------------
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Trust 3 = ----------------------------------------------------
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State = ---------

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

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

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

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

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

This letter responds to a letter dated February 25, 2025 submitted on behalf of X by its
authorized representatives, requesting relief under § 1362(f) of the Internal Revenue
Code (Code).

PLR-105309-25 2

                                    FACTS

According to the information submitted and representations within, X was incorporated
under the laws of State on Date 1 and filed an election under § 1362(a) of the Code to
be treated as an S corporation effective Date 2. Trust 1 and Trust 2, which are both
Electing Small Business Trusts (ESBTs) as defined in § 1361(e)(1), hold shares of
voting stock in X. Trust 1 and Trust 2 are permissible S corporation shareholders under
§ 1361(c)(2)(A)(v).

On Date 3, the trustees of Trust 1 and Trust 2 transferred their shares of X to Trust 3.
Trust 3 was intended to be a qualified voting trust governed pursuant to a Voting Trust
Agreement and a permissible S corporation shareholder under § 1361(c)(2)(A)(iv).
However, Trust 3 was an ineligible shareholder. As a result, X’s S corporation election
terminated on Date 3.

X was made aware of the termination of its S corporation status in connection with a
review of the Voting Trust Agreement of Trust 3. As a result, on Date 4, the trustees
modified the Voting Trust Agreement of Trust 3 to cause Trust 3 to be an eligible S
corporation shareholder pursuant to § 1361(c)(2)(A)(iv).

X represents that X and its shareholders intended for X to be an S corporation effective
Date 2 and that X and Trust 1, Trust 2, and Trust 3 have filed tax returns consistent with
X’s status as an S corporation since Date 2 and Trust 1, Trust 2, and Trust 3 have filed
all returns consistent with their status as eligible S corporation shareholders since Date

3. X further represents that the circumstances resulting in the termination of its S
   corporation election were inadvertent and were not motivated by tax avoidance or
   retroactive tax planning. X and its shareholders agree to make any adjustments
   required as a condition of obtaining relief for the termination of X's election as provided
   under § 1362(f) of the Code that may be required by the Secretary.

                            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) provides that the term “small business corporation” means 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 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

PLR-105309-25 3

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

Section 1361(c)(2)(A)(iv) of the Code provides that a trust created primarily to exercise
the voting power of stock transferred to it is a permitted S corporation shareholder.
Section 1361(c)(2)(B)(iv) provides that in the case of a trust described in
§ 1361(c)(2)(A)(iv), each beneficiary of the trust shall be treated as a shareholder.

Section 1361(c)(2)(A)(v) provides that for purposes of § 1361(b)(1)(B), an ESBT is a
permissible shareholder.

Section 1.1361-1(h)(1)(v) of the Income Tax Regulations provides that a voting trust is a
permitted S corporation shareholder (a "qualified voting trust") if the trust (i) was created
primarily to exercise the voting power of the property transferred to it, (ii) the beneficial
owners are treated as the owners of their respective portions of the trust under Subpart
E (i.e., it is a wholly-grantor trust), and (iii) was created pursuant to a written trust
agreement entered into by the shareholders that (A) delegates to one or more trustees
the right to vote, (B) requires all distributions with respect to the stock of the corporation
held by the trust to be paid to, or on behalf of, the beneficial owners of that stock, (C)
requires title and possession of that stock to be delivered to those beneficial owners
upon the termination of the trust, and (D) terminates, under its terms or by state law, on
or before a specific date or event.

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 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, 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.

PLR-105309-25 4

                                CONCLUSION

Based solely on the information submitted and the representations made, we conclude
that X's S corporation election terminated on Date 3, when Trust 1 and Trust 2
transferred shares of X to Trust 3, an ineligible shareholder. We conclude that the
circumstances resulting in the termination of X's S corporation election were inadvertent
within the meaning of § 1362(f). Accordingly, pursuant to the provisions of § 1362(f), X
will be treated as an S corporation from Date 3 and thereafter, provided X's S
corporation election is otherwise effective and not terminated under § 1362(d).
Furthermore, Trust 3 will be treated as a qualified voting trust from Date 3 and
thereafter.

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 is otherwise
eligible to be an S corporation or whether Trust 3 is otherwise eligible to be a qualified
voting trust.

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 upon examination.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.

In accordance with the power of attorney on file with this office, we are sending a copy
of this letter to X's authorized representative.

                                 Sincerely,

                                     /s/ Laura C Fields
                                  Laura Fields
                                  Chief, Branch 1
                                  Office of Associate Chief Counsel
                                  (Passthroughs, Trusts, and Estates)

Enclosure
Copy for § 6110 purpose

PLR-105309-25 5

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