Inadvertent S-corp terminations excused after trusts missed QSST and ESBT elections

Plain-English summary

An S corporation can only have certain kinds of shareholders. When a shareholder dies and stock passes to a trust, the trust can hold it for a two-year grace period, but to keep it longer the trust (or its beneficiary) must file a special election, either as a qualified subchapter S trust (QSST) or an electing small business trust (ESBT). Here two related S corporations had their stock move through several trusts after a shareholder's death, and the required QSST and ESBT elections were never filed, so both companies technically lost their S corporation status. The corporations asked the IRS to treat the terminations as inadvertent under § 1362(f). The IRS agreed, finding the lapses were not motivated by tax avoidance, and ruled that both companies will continue to be treated as S corporations without interruption. Relief is conditional: the trusts must file the missing ESBT and QSST elections within 120 days, and each corporation must send in a specified corrective payment within 45 days.

Ruling snapshot

• Question: Were the two corporations' S elections inadvertently terminated when trusts failed to file required QSST and ESBT elections, and can S status be preserved?
• Outcome: approved (inadvertent termination relief under § 1362(f), conditioned on filing elections and payments)
• Key authorities: IRC § 1362(f); IRC § 1361(c)(2), (d), (e); Treas. Reg. § 1.1361-1(j) and (m); IRC § 1362(d)(2)

Full text (IRS public release)

 Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

 Number: 202610001                                            Third Party Communication: None
 Release Date: 3/6/2026                                       Date of Communication: Not Applicable
 Index Numbers: 1361.03-00, 1361.03-02,
               1361.03-03, 1362.02-00,                        Person To Contact:
               1362.04-00                                     ----------------------, ID No. -----------------
                                                              Telephone Number:
 -----------------                                            --------------------
 ------------------------------------                         Refer Reply To:
 --------------------------------------------                 CC:PSI:B3
 -----------------------------                                PLR-109190-25
 ----------------------------                                 PLR-109191-25
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                                                              Date:
                                                              November 18, 2025




                                                   Legend

X             = -----------------
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Y            = -------------------------------------
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A            = -----------------------

B            = --------------------
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Trust 1 = ---------------------------------------------------
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Trust 2     = ------------------------------------------------------------

Trust 3 = ------------------------------------------------
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Trust 4 = ------------------------------------------------------
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Trust 5 = --------------------------------------------------------------
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Trust 6 = ----------------------------------------------
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State      = ------------------

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

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

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

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

Date 5     = ---------------------------

Date 6     = -------------------

Date 7     = --------------------

m           = -----------

n           = --------



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

       This letter is in response to your letter dated April 11, 2025, and subsequent
correspondence, submitted on behalf of State corporations, X and Y (Taxpayers), by
their authorized representative, requesting rulings under § 1362(f) of the Internal
Revenue Code (Code).

                                                      Facts

       The information submitted states that X was incorporated on Date 1 and elected
to be an S corporation effective Date 2. Y was incorporated on Date 3 and elected to
be an S corporation effective Date 2.

      A, an individual, owned shares of X and Y. On Date 4, A died. On Date 4,
pursuant to the terms of A's will, A's estate transferred shares of X and Y to Trust 1 and
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Trust 2. For a 2-year period beginning on Date 4, Trust 1 and Trust 2 were eligible S
corporation shareholders under § 1361(c)(2)(A)(iii).

        On Date 5, Trust 2 distributed it shares in X and Y to B, an individual. Also on
Date 5, B distributed the shares B received in X and Y to Trust 3, Trust 4, Trust 5, and
Trust 6. X and Y represent that Trust 3, Trust 4, Trust 5, and Trust 6 were eligible to be
qualified subchapter S trusts (QSSTs) under § 1361(d) effective Date 5. However, the
income beneficiary of each of Trust 3, Trust 4, Trust 5, and Trust 6 failed to make an
election under § 1361(d)(2) to treat Trust 3, Trust 4, Trust 5, and Trust 6 as a QSST
effective Date 5 with respect to each of X and Y. Consequently, X and Y’s S
corporation elections terminated on Date 5.

Following the death of A, Trust 1 continued to be an eligible S corporation shareholder
for two years beginning on Date 4 under § 1361(c)(2)(A)(iii). X and Y represent that
Trust 1 was eligible to be an ESBT under § 1361(e)(1) effective Date 7. However, the
trustee(s) of Trust 1 failed to make an election under § 1361(e)(3) treating Trust 1 as an
ESBT effective Date 7. Therefore, X and Y’s S corporation elections would have
terminated on Date 7, had they not previously terminated.

       X and Y represent that the circumstances resulting in the termination of their S
corporation elections were inadvertent and were not motivated by tax avoidance or
retroactive tax planning. Taxpayers and their shareholders agree to make any
adjustments (consistent with the treatment of Taxpayers as S corporations) as 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)(B) provides that the term “small business corporation” means
a domestic corporation that is not an ineligible corporation and which does not, among
other requirements, 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 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) as owned by
an individual who is a citizen or resident of the United States may be an S corporation
shareholder.

       Section 1361(c)(2)(A)(iii) provides that, for purposes of § 1361(b)(1)(B), a trust
with respect to stock transferred to it pursuant to the terms of a will, may be an S
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corporation shareholder, but only for the 2-year period beginning on the day on which
such stock is transferred to it.

     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(d)(1) provides that, in the case of a QSST with respect to which a
beneficiary makes an election under § 1361(d)(2) – (A) such trust shall be treated as a
trust described in § 1361(c)(2)(A)(i), (B) for purposes of § 678(a), the beneficiary of such
trust shall be 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, and
(C) for purposes of applying §§ 465 and 469 to the beneficiary of the trust, the
disposition of the S corporation stock by the trust shall be treated as a disposition by
such beneficiary.

      Section 1361(d)(2) provides that a beneficiary of a QSST (or his legal
representative) may elect to have § 1361(d) apply.

         Section 1361(d)(3) provides that, for purposes of § 1361, the term “qualified
subchapter S trust” means 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 1361(e)(1)(A) provides that, for purposes of § 1361, except as provided
in § 1361(e)(1)(B), the term “electing small business trust” 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)-(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 subsequent taxable years of such trust unless revoked with the consent of the
Secretary.
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       Section 1.1361-1(j)(6)(i) of the Income Tax Regulations provides, in part, that a
QSST election must be made separately with respect to each corporation whose stock
is held by the trust.

       Section 1.1361-1(j)(6)(ii) provides that the current income beneficiary of a QSST
must make the election by signing and filing with the service center for which the S
corporation files its income tax return, the applicable form or a statement that includes
the information listed in § 1.1361-1(j)(6)(ii).

        Section 1.361-1(j)(6)(iii) provides, in part, that a QSST election must be filed
within the time requirements of § 1.1361-1(j)(6)(iii)(A) through (D).

      Section 1.1361-1(m)(2)(i) provides, in part, that the trustee of an ESBT must
make the ESBT election by signing and filing, with the service center for which 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.

       Section 1.1361-1(m)(2)(iii) provides that the ESBT election must be filed within
the time requirements prescribed in § 1.1361-1(j)(6)(iii) for filing a QSST election.

       Section 1.1361-1(m)(2)(iv) provides that a trust that is a qualified S corporation
shareholder under § 1361(c)(2)(A)(ii) or (iii) may elect ESBT treatment at any time
during the 2-year period described in those sections or the 16-day and 2-month period
beginning on the date after the end of the 2-year period.

      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)(A) provides that an election under § 1362(a) is 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 part, that if (1) an election under § 1362(a) by any
corporation (A) was not effective for the taxable year for which made (determined
without regard to § 1361(b)(2)) by reason of failure to meet the requirements of
§ 1361(b), or (B) 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
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corporation, and (4) the corporation for which the election was made or the termination
occurred, and each person who was a shareholder of the corporation at any time during
the period specified pursuant to § 1362(f), agree to make the adjustments (consistent
with the treatment of the 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, the corporation shall be treated as an S
corporation during the period specified by the Secretary.

                                        Conclusion

        Based solely on the facts submitted and the representations made, we conclude
that X and Y’s S corporation elections terminated on Date 5 when shares of X and Y
were transferred to Trust 3, Trust 4, Trust 5, and Trust 6, ineligible S corporation
shareholders. We also conclude that had X and Y’s S corporation elections been
effective not terminated on Date 5, each election would have subsequently terminated
as described in this letter. Further, we conclude that the circumstances resulting in the
termination of X and Y’s S corporation elections were inadvertent within the meaning of
§ 1362(f). Therefore, under § 1362(f), X and Y will continue to be treated as S
corporations from Date 5, provided that X and Y’s S corporation elections were valid
and have not otherwise terminated under § 1362(d) for reasons not addressed in this
letter.

       These rulings are conditioned on: (1) the trustee(s) of Trust 1 filing an ESBT
election for Trust 1 effective Date 7, with respect to X and Y, and (2) the income
beneficiary of each of Trust 3, Trust 4, Trust 5, and Trust 6 filing a QSST election for
Trust 3, Trust 4, Trust 5, and Trust 6, respectively, effective Date 5, with respect to each
of X and Y. The elections must be made with the appropriate service center within 120
days from the date of this letter and a copy of this letter should be attached to each
ESBT and QSST election.

        Furthermore, as an adjustment under § 1362(f)(4), X must send a payment of
$m, and Y must send a payment of $n. Each payment must be accompanied by a copy
of this letter, and must be sent within 45 days from the date of this letter to the following
address:

       Internal Revenue Service
       Kansas City Service Center
       333 W. Pershing Road
       Kansas City, MO 64108
       Stop 7777
       Attn: Manual Deposit

       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
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in this letter. Specifically, we express or imply no opinion regarding (i) Taxpayers’
eligibility to be S corporations, (ii) Trust 1’s eligibility to be an ESBT, or (iii) Trust 3, Trust
4, Trust 5, or Trust 6’s eligibility to be a QSST.

      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.



                                                 Sincerely,



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


Enclosure:
      Copy of this letter for § 6110 purposes

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