Inadvertent S-corp termination relief under 1362(f) after five trust shareholders missed their QSST elections

Plain-English summary

An S corporation can only have certain kinds of shareholders. A trust generally
qualifies only if its beneficiary makes a "qualified subchapter S trust" (QSST)
election on time. Here, five trusts acquired stock in an S corporation, but the
beneficiaries never filed their QSST elections, so the trusts were ineligible
shareholders and the corporation's S election automatically terminated. The
corporation represented that this was an inadvertent slip, not tax planning,
and that everyone had kept filing as if the S election was still valid. It asked
the IRS for relief under section 1362(f), which lets the IRS forgive an
inadvertent termination. The IRS agreed the termination was inadvertent and
ruled that the corporation will be treated as continuing to be an S corporation,
as long as, within 120 days, each trust's beneficiary files the missing QSST
election and everyone files any needed returns consistent with S status. If
those conditions are not met, the termination stands.

Ruling snapshot

• Question: Was the S corporation's termination (caused by trust
  beneficiaries missing their QSST elections) inadvertent, so the corporation
  can keep its S status under § 1362(f)?
• Outcome: Approved (inadvertent termination relief granted, subject to
  120-day conditions).
• Key authorities: IRC §§ 1361(b), 1361(c)(2), 1361(d) (QSST); § 1362(a),
  (d)(2), (f); Treas. Reg. § 1.1361-1(j)(6).

Full text (IRS public release)

Internal Revenue Service                       Department of the Treasury
                                               Washington, DC 20224

Number: 202612004                  Third Party Communication: None
Release Date: 3/20/2026            Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.04-00
                                               Person To Contact:
                                               ----------, ID No. --------
                                               Telephone Number:
                                               --------
                                               Refer Reply To:
                                               CC:PT&E:01
                                               PLR-111905-25
                                               Date:
                                               December 18, 2025


                                    LEGEND

X            = --------
State        = --------
Date 1       = --------
Date 2       = --------
Date 3       = --------
Date 4       = --------
Trust 1      = --------
Trust 2      = --------
Trust 3      = --------
Trust 4      = --------
Trust 5      = --------


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

This letter responds to a letter dated May 28, 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

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, Trust 1, Trust 2, Trust 3, and Trust 4 each acquired shares of X stock. On
Date 4, Trust 5 acquired shares of X stock. X represents that Trust 1, Trust 2, Trust 3,
and Trust 4 were eligible to make Qualified Subchapter S Trust (QSST) elections as of
Date 3 and that Trust 5 was eligible to make a QSST election as of Date 4. However,
each of the trust beneficiaries failed to make a timely QSST election for their respective
trust. Thus, Trust 1, Trust 2, Trust 3, and Trust 4 were ineligible shareholders of X on
Date 3, and Trust 5 was an ineligible shareholder of X on Date 4, causing X's S
corporation election to terminate effective Date 3.

X represents that the circumstances resulting in the termination of X's S corporation
election were inadvertent and not motived by tax avoidance or retroactive tax planning.
X further represents that for each taxable year since X elected to be an S corporation, X
and its shareholders have filed their federal income tax returns consistent with having a
valid S corporation election in effect for X. 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).

                                     LAW

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, in part, 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.

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.

                                 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, Trust 2, Trust 3, and
Trust 4 became shareholders because their respective beneficiaries failed to file timely
QSST elections under § 1361(d)(2). If the election had not terminated on Date 3, we
conclude that it would have terminated on Date 4 when Trust 5 became a shareholder
of X. We further 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 continuing to be an S
corporation from Date 3 and thereafter, provided that X'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 Trust 1, Trust 2, Trust 3, and Trust 4 each
file an election to treat Trust 1, Trust 2, Trust 3, and Trust 4, respectively, as QSSTs
effective Date 3 with the appropriate service center; (2) the beneficiaries of Trust 5 must
file an election to treat Trust 5 as a QSST effective Date 4, and (3) 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 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
eligibility to be an S corporation or the eligibility of Trust 1, Trust 2, Trust 3, Trust 4, and
Trust 5 to be QSSTs.

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 X's
authorized representative.

                                                Sincerely,


                                                ____________________________
                                                Joy C. Spies
                                                Senior Technician Reviewer, Branch 1
                                                Office of the Associate Chief Counsel
                                                (Passthroughs, Trusts, and Estates)



Enclosure
      Copy of this letter for section 6110 purposes

cc: --------