An S corporation's status terminated when trusts holding its shares missed their QSST elections, but the lapse was inadvertent and S status is restored

Plain-English summary

An S corporation can only have certain kinds of shareholders. A trust generally
does not qualify unless its beneficiary files a "Qualified Subchapter S Trust"
(QSST) election, which treats the beneficiary as the owner of the S corporation
stock. Here, a shareholder transferred his shares to three trusts. The trusts met
all the QSST requirements, but their beneficiaries never filed the QSST elections,
so the trusts became ineligible shareholders and the company's S election
automatically terminated on the transfer date. The company kept filing as an S
corporation anyway. It asked the IRS for relief under Section 1362(f), which lets
the IRS forgive an inadvertent termination when it is fixed within a reasonable
time and the owners agree to any needed adjustments. The IRS found the failure
inadvertent and ruled the company is treated as an S corporation continuously,
provided that within 120 days the beneficiaries file their QSST elections
(effective back to the transfer date) and the company and its shareholders file any
necessary returns. If those conditions are not met, the ruling is void.

Ruling snapshot

• Question: Was the termination of the S election (caused by trusts' failure to make timely QSST elections) inadvertent, so S corporation status can be restored?
• Outcome: Approved (inadvertent-termination relief under § 1362(f), conditioned on 120-day QSST filings)
• Key authorities: IRC § 1361(b)(1), § 1361(d) (QSST); § 1362(d)(2); § 1362(f)

Full text (IRS public release)

Internal Revenue Service                        Department of the Treasury
                                                Washington, DC 20224

Number: 202551034                               Third Party Communication: None
Release Date: 12/19/2025                        Date of Communication: Not Applicable
Index Number: 1362.04-00
                                                Person To Contact:
------------------------------------------------   -----------------------------------, ID No. -------
--------------------------------------          -----------------
------------------------------                  Telephone Number:
---------------------------                     --------------------
---------------------------                     Refer Reply To:
                                                CC:PSI:B03
                                                PLR-105479-25

                                                Date:
                                                July 31, 2025


                                                   LEGEND

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

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

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

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

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

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

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

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

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

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

       This responds to a letter dated March 11, 2025, submitted on behalf of X by X's
authorized representatives, requesting relief under section 1362(f) of the Internal
Revenue Code.

                                          FACTS

       The information submitted states that X was incorporated under the laws of State
on Date 1 and elected to be treated as an S corporation effective Date 2. On Date 3, A
transferred shares of X to Trust 1, Trust 2, and Trust 3.

        It is represented that Trust 1, Trust 2, and Trust 3 were eligible to make Qualified
Subchapter S Trust (QSST) elections under § 1361(d)(2), effective Date 3. However,
the beneficiaries of Trust 1, Trust 2, and Trust 3 failed to make QSST elections for the
trusts to be eligible S corporation shareholders; thus, Trust 1, Trust 2, and Trust 3
became ineligible shareholders of X on Date 3. Accordingly, the failure to make QSST
elections caused X's S election to terminate on Date 3.

       X and its shareholders have filed all income tax returns consistent with having an
election to be treated as an S corporation for all taxable years since Date 3. Trust 1,
Trust 2, and Trust 3 have always met the QSST requirements within the meaning of
§ 1361(d), except that the beneficiaries did not make timely QSST elections under
§ 1361(d). It is represented that the failure to file QSST elections was inadvertent and
not motivated by tax avoidance or retroactive tax planning. X and each of its
shareholders agree to make any adjustments required by the Secretary as a condition
of obtaining relief under the inadvertent termination rule as provided under § 1362(f).

                                  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) 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(d)(1) provides, in part, 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 the trust
is 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 (or his legal
representative) may elect to have § 1361(d) apply.

         Section 1361(d)(3) defines a QSST as a trust, (A) the terms of which require that
(i) during the life of the current income beneficiary, there shall be only one income
beneficiary of the trust, (ii) any corpus distributed during the life of the current income
beneficiary may be distributed only to 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 the 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
resident of the United States.

      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)
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); (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;
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) 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 because the beneficiaries of Trust 1,
Trust 2, and Trust 3 failed to timely make QSST elections under § 1361(2). However,
the termination of X's S corporation election was inadvertent within the meaning of
§ 1362(f). Accordingly, X shall be treated as an S corporation from Date 3 and
thereafter, provided its S corporation election is not otherwise terminated under
§ 1362(d).

        This letter ruling is subject to the conditions that within 120 days from the date of
this letter (1) the beneficiaries of Trust 1, Trust 2, and Trust 3 file QSST elections with
respect to Trust 1, Trust 2, and Trust 3, effective Date 3, with the appropriate service
center and (2) X and its shareholders file any necessary original or amended returns
consistent with the relief granted in this letter. A copy of this letter should be attached to
each QSST election and any original or amended returns.

       If the above conditions are not met, then this ruling is null and void. Also, 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 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 and the regulations thereunder, including whether X was otherwise a valid S
corporation or whether Trust 1, Trust 2, or Trust 3 are valid QSSTs within the meaning
of § 1361(2).

       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 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 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 your authorized representatives.

                                       Sincerely,



                                        _______________________________
                                       Richard T. Probst
                                       Senior Technician Reviewer, Branch 3
                                       Office of the Associate Chief Counsel
                                       (Passthroughs, Trusts, and Estates)



Enclosure
      Copy for § 6110 purposes

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