Inadvertent S corporation termination excused after trust beneficiaries missed their QSST elections

Plain-English summary

An S corporation can only have certain kinds of shareholders; a trust generally qualifies only if the beneficiary files a Qualified Subchapter S Trust (QSST) election on time. Here five trusts acquired stock in an S corporation, but none of their beneficiaries made the required QSST elections, so the trusts were ineligible shareholders and the company's S election terminated automatically on that date. The stock was later contributed to a new holding company in what the taxpayer treated as an F reorganization, with the operating company becoming a qualified subchapter S subsidiary. The successor company asked the IRS to treat the termination as inadvertent under section 1362(f). The IRS agreed the termination was inadvertent and ruled that the company will be treated as continuing to be an S corporation, on the condition that within 120 days the trust beneficiaries file their QSST elections effective as of the original date and the parties file consistent returns for open years. The IRS gave no opinion on whether the entities are otherwise eligible or on the validity of the F reorganization.

Ruling snapshot

• Question: Was the termination of the company's S corporation election inadvertent, so that it can be treated as continuing to be an S corporation?
• Outcome: Approved (relief granted under § 1362(f), subject to 120-day conditions)
• Key authorities: IRC §§ 1362(f), 1361(d) (QSST), 1361(b)(3)(B) (QSub); § 368(a)(1)(F); Rev. Rul. 2008-18

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202552020 Third Party Communication: None
Release Date: 12/26/2025 Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.04-00
Person To Contact:
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--------------------- Telephone Number:
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------------------------------ Refer Reply To:
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------------------------ PLR-108995-25

                                                        Date:
                                                        August 20, 2025

Legend

X = ---------------------------------------------------------------------
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Y = ---------------------------------------------------------------------
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State 1 = -------------

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

Trust 1 = ---------------------------------------------------------------------
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Trust 2 = ---------------------------------------------------------------------
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Trust 3 = ---------------------------------------------------------------------
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Trust 4 = ---------------------------------------------------------------------
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Trust 5 = ---------------------------------------------------------------------
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Date 1 = ----------------------
2
PLR-108995-25

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

Date 3 = ------------------
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Date 4 = ---------------------------------------------------------------------
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Date 5 = ---------------------

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

   This responds to a letter dated March 28, 2025, submitted on behalf of X by its

authorized representatives, requesting a ruling under § 1362(f) of the Internal Revenue
Code (Code).

                                              FACTS

  According to the information submitted and representations made, Y was

incorporated under the laws of State 1 on Date 1 and elected to be treated as an S
corporation effective Date 2.

    On Date 3, Trust 1, Trust 2, Trust 3, Trust 4, and Trust 5 (collectively,

Shareholder Trusts) each acquired shares of Y stock. X, as Y's successor, represents
that the Shareholder Trusts were each eligible to make Qualified Subchapter S Trust
(QSST) elections as of Date 3; however, each of the trust beneficiaries failed to timely
make QSST elections for their respective trusts. Thus, the Shareholder Trusts were
ineligible shareholders of Y on Date 3, causing Y's S corporation election to terminate
effective Date 3.

   X was formed under the laws of State 2 on Date 4. On Date 5, as part of what X

represents was a reorganization under § 368(a)(1)(F), (1) the owners of all stock in Y,
including Trust 1, Trust 2, Trust 3, Trust 4, and Trust 5, contributed all such stock to X,
and (2) X elected to treat Y as a Qualified Subchapter S Subsidiary within the meaning
of § 1361(b)(3)(B) effective Date 5.

   X represents that the circumstances resulting in the termination of X's

predecessor Y's S corporation election were inadvertent and not motivated by tax
avoidance or retroactive tax plannings. X further represents that for each taxable year
since X's predecessor Y elected to be an S corporation, X, its predecessor Y, and its
shareholders have filed their federal income tax returns consistent with having a valid S
corporation election in effect for X and its predecessor Y.

   X and its shareholders have agreed to make any adjustments consistent with the

treatment of X as an S corporation as may be required by the Secretary with respect to
the period specified by § 1362(f).
PLR-108995-25 3

                              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) defines a "small business corporation," in part, as a

domestic corporation that is not an ineligible corporation and that does not 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(c)(2)(A)(i) provides that, for the 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 is a
permitted S corporation shareholder.

   Section 1361(d)(1) provides that a QSST whose beneficiary makes an election

under § 1361(d)(2) will be treated as a trust described in § 1361(c)(2)(A)(i) and the
beneficiary of such trust shall be treated as the owner (for purposes of § 678(a)) 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)(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 the 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 that
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 1.1361-1(j)(6)(ii) of the Income Tax Regulations provides that the current

income beneficiary of the trust must make the election by signing and filing with the
service center with which the corporation files its income tax return the applicable form
or a statement that meets the requirements of § 1.1361-1(j)(6)(ii)(A) through (E).

   Section 1.1361-1(j)(6)(iii) provides that the QSST election must be filed within the

time requirements of § 1.1361-1(j)(6)(iii) (A) through (E).

  Section 1362(a) provides that, except as provided in § 1362(g), a small business

corporation may elect to be an S corporation.
PLR-108995-25 4

   Section 1362(d)(2)(A) provides that an election under § 1362(a) will be

terminated whenever (at any time on or after the 1st day of the 1st 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 terminated under § 1362(d)(2) or (3); (2) the Secretary
determines that the circumstances resulting in such termination were inadvertent; (3) no
later than a reasonable period of time after discovery of the circumstances resulting in
the termination, steps were taken so that the corporation for which the termination
occurred is a small business corporation; and (4) the corporation for which the
termination occurred, and each person who was a shareholder of the corporation at any
time during the period specified under § 1362(f), agrees to make the adjustments
(consistent with the treatment of the corporation as an S corporation) as may be
required by the Secretary for that period, then, notwithstanding the circumstances
resulting in such termination, the corporation shall be treated as an S corporation during
the period specified by the Secretary.

    Rev. Rul. 2008-18, situation 1, holds that, consistent with Rev. Rul. 64-250,

1064-2, C.B. 333, a reorganization under § 368(a)(1)(F) did not cause the termination of
an S corporation election under §1362. In Rev. Rul. 2008-18, B, an individual owns all
of the stock in Y, an S corporation. In Year 1, B forms Newco and contributes all of the
Y stock to Newco. Newco meets the requirements for qualification as a small business
corporation and timely elects to treat Y as a qualified subchapter S subsidiary (QSub),
effective immediately following the transaction. The transaction meets the requirements
of a reorganization under § 368(a)(1)(F). Y's original S election does not terminate but
continues for Newco. Newco must obtain a new EIN. Y must retain its EIN even though
a QSub election is made for it and must use its original EIN at 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.

                                 CONCLUSION

     Based solely on the information submitted and the representations made, we

conclude that X's predecessor Y's S corporation election terminated on Date 3 when the
Shareholder Trusts became shareholders because their respective beneficiaries failed
to file timely QSST elections under § 1361(d)(2). We further conclude that the
circumstances resulting in the termination of X's predecessor Y's S corporation election
were inadvertent within the meaning of § 1362(f). Accordingly, pursuant to the
provisions of § 1362(f), X and its predecessor Y will be treated as continuing to be an S
corporation from Date 3 and thereafter, provided that X's predecessor Y's S corporation
election was valid and was not otherwise terminated under § 1362(d).

   This letter is subject to the following conditions, which must occur within 120

days from the date of this letter: (1) the beneficiaries of the Shareholder Trusts must
PLR-108995-25 5

each file an election to treat each Shareholder Trust, respectively, as QSSTs effective
Date 3 with the appropriate service center; and (2) X and each of its shareholders must
file any necessary original or amended returns for all open taxable years consistent with
the relief granted in this letter. A copy of this letter should be attached to each QSST
election. Furthermore, if these conditions are not met, X must notify the service center
where X's predecessor Y's S corporation election is filed that its S corporation election
has terminated effective Date 3.

     Except as specifically set forth above, we express or imply no opinion concerning

the federal tax consequences of the transactions described above under any other
provision of the Code. Specifically, we express or imply no opinion regarding X's or Y's
eligibility to be an S corporation or the eligibility of the Shareholder Trusts to be QSSTs.
Further, we express or imply no opinion on the validity of the reorganization under
§ 368(a)(1)(F) and its tax consequences.

   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 that requested it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.

   Pursuant to a power of attorney on file, a copy of this letter is being sent to your

authorized representative.

                                       Sincerely,



                                       __________________________
                                       Jennifer N. Keeney
                                       Senior Counsel, Branch 1
                                       Office of Associate Chief Counsel
                                       (Passthroughs, Trusts, and Estates)

PLR-108995-25 6

Enclosure:

    Copy of this letter for section 6110 purposes

cc:
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