Inadvertent-termination relief where an S corporation's status lapsed because a trust shareholder missed its QSST election

Plain-English summary

An S corporation can only have certain kinds of shareholders. A trust can
qualify while it is treated as owned by a living individual, and it stays
eligible for two years after that owner dies; after that, it must elect to be
a "qualified subchapter S trust" (QSST) to keep holding the stock. Here, a
shareholder's stock went into such a trust, the trust owner died, and after
the two-year grace period expired the trust needed to make a QSST election
but the beneficiary never filed it on time. That made the trust an ineligible
shareholder and automatically terminated the corporation's S status. The
corporation asked the IRS for relief under § 1362(f), which lets the IRS
disregard an inadvertent termination if the failure was not tax-motivated and
the company and shareholders fix it and file consistently. Because everyone
had reported income as if the S election were still valid, the IRS found the
termination inadvertent and ruled the company will be treated as continuing
to be an S corporation, provided the trust beneficiary's legal representative
files the late QSST election within 120 days.

Ruling snapshot

• Question: Was the termination of the company's S election (caused by a
  trust's late QSST election) inadvertent, so that S status can be restored?
• Outcome: Approved (inadvertent termination; S status continues, subject
  to a late QSST election within 120 days)
• Key authorities: IRC § 1361(c)(2), (d); IRC § 1362(d)(2) and (f);
  Treas. Reg. § 1.1361-1(j)(6)

Full text (IRS public release)

Internal Revenue Service                       Department of the Treasury
                                               Washington, DC 20224

Number: 202614003                              Third Party Communication: None
Release Date: 4/3/2026                         Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.03-00,
              1361.03-02, 1362.00-00,          Person To Contact:
              1362.04-00                       ----------------------, ID No. -----------------
                                               Telephone Number:
---------------------                          ---------------------
--------------------------------------------   Refer Reply To:
----------------------------------             CC:PT&E:B03
---------------------------                    PLR-104974-25
------------------------------------           Date:
                                               December 30, 2025




Legend

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

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

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

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

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

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

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

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

Trust         = ------------------------
                ------------------------

A             = -----------------
PLR-104974-25                                2

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

        This letter responds to a letter dated February 14, 2025, and subsequent
correspondence, submitted on behalf of X by its authorized representative, requesting
relief under § 1362(f) of the Internal Revenue Code (Code).

                                          FACTS

       According to the information submitted, X was incorporated under the laws of
State and elected to be an S corporation effective Date 1. A, a shareholder of X,
transferred shares of X to Trust on Date 2. Trust was treated under subpart E of part I
of subchapter J of chapter 1 as owned by A. Thus, Trust was an eligible shareholder of
X under § 1361(c)(2)(A)(i). A died on Date 3. Under § 1361(c)(2)(A)(ii), Trust remained
an eligible shareholder for a 2-year period beginning on the day of A’s death. Following
the expiration of the 2-year period on Date 4, Trust continued to hold shares of X stock.
On Date 5, the beneficiary of Trust died. On Date 6, all the shares of X held by Trust
were transferred to two trusts that X represents were eligible shareholders under
§ 1361(c)(2)(A)(i) at the time of the transfer.

        X represents that Trust was eligible to make a Qualified Subchapter S Trust
(QSST) election under § 1361(d) effective Date 4. However, the beneficiary of Trust
failed to timely make the QSST election and Trust became an ineligible shareholder of
X on Date 4. Accordingly, X’s S corporation election terminated on Date 4.

        X represents that X and each of its shareholders have filed all federal tax returns
consistently with the treatment of X as an S corporation. X represents that the failure to
file the QSST election for Trust was not motivated by tax avoidance or retroactive tax
planning. Further, X represents that all income with respect to the stock of X held by
the Trust was consistently reported by the beneficiary on the beneficiary’s federal
income tax returns as if the QSST election had been effective Date 4. 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.

                                  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 which is not an ineligible corporation and which does 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.
PLR-104974-25                                  3

       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)(ii) provides that for purposes of § 1361(b)(1)(B), a trust
which was described in § 1361(c)(2)(A)(i) immediately before the death of the deemed
owner and which continues in existence after such death may be an S corporation
shareholder, but only for the 2-year period beginning on the day of the deemed owner’s
death.

       Section 1361(d)(1) provides that in the case of a QSST for 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 shall be
treated as the owner of that portion of the trust that 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 may elect to have
§ 1361(d) apply.

       Section 1.1361-1(j)(6)(ii) provides that the current income beneficiary of a QSST
must make the election under § 1361(d)(2) by signing and filing with the service center
with which the corporation files its income tax returns the applicable form or a statement
including the information listed in § 1.1361-1(j)(6)(ii).

        Section 1.1361-1(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(j)(6)(iii)(E) provides that if a corporation's S election terminates
because of a late QSST election, the corporation may request inadvertent termination
relief under§ 1362(f).

         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.
PLR-104974-25                                 4

      Section 1362(a)(1) 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) 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 terminated under § 1362(d)(2); (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 such
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 in the corporation at any time during
the period specified pursuant to § 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 with respect to such period, then, notwithstanding the circumstances resulting
in the 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 representations made, we conclude that
X’s S corporation election terminated on Date 4 when Trust became an ineligible
shareholder due to the failure to make a QSST election. 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 4 and thereafter, provided that X’s S
corporation election was valid and has not otherwise terminated under § 1362(d).

       This ruling is contingent on the legal representative of Trust’s beneficiary filing a
QSST election effective Date 4 within 120 days from the date of this letter with the
appropriate service center. A copy of this letter should be attached to the QSST
election.

       Except as specifically ruled upon above, we express or imply no opinion
concerning the federal tax consequences of the facts of this case under any other
provision of the Code and the regulations thereunder. Specifically, we express or imply
no opinion regarding X’s eligibility to be an S corporation or Trust’s eligibility to be a
QSST.
PLR-104974-25                                         5

       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 requested ruling, 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.

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


                                                Sincerely,

                                                Elizabeth V. Zanet

                                                Elizabeth V. Zanet
                                                Senior Technician Reviewer, Branch 3
                                                Office of the Associate Chief Counsel
                                                (Passthroughs, Trusts, and Estates)



Enclosure:
      Copy of this letter for § 6110 purposes

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