Inadvertent S-corp termination relief after three trusts missed their QSST elections
Plain-English summary
An S corporation's stock passed into a series of trusts. One shareholder put
his shares into a grantor trust, which was an eligible S-corporation
shareholder while he was alive and for two years after his death. When that
two-year window closed, and later when the shares moved to two more trusts,
each trust needed its beneficiary to file a Qualified Subchapter S Trust
(QSST) election to keep the trust an eligible shareholder. The beneficiary
never filed those elections on time, so the trusts became ineligible
shareholders and the company's S-corporation election terminated. The company
asked the IRS for relief under Section 1362(f), which lets the IRS overlook an
S-election termination that was inadvertent. The IRS found the termination
inadvertent, so it treated the company as having stayed an S corporation and
treated all three trusts as QSSTs, on the condition that the beneficiary files
the missing QSST elections within 120 days. This matters because losing
S-corporation status triggers corporate-level tax; Section 1362(f) is the
standard fix for honest slip-ups like missed trust elections.
Ruling snapshot
- Question: Was the termination of the company's S-corporation election (caused by missed QSST elections) inadvertent, so it can be treated as continuing as an S corporation under § 1362(f)?
- Outcome: Approved (inadvertent; S status preserved, contingent on filing QSST elections within 120 days)
- Key authorities: IRC § 1362(f); IRC § 1361(c)(2), § 1361(d); Treas. Reg. § 1.1361-1(j)(6)
Full text (IRS public release)
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 202618004 Third Party Communication: None
Release Date: 5/1/2026 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-112694-25
Date:
January 27, 2026
Legend
X = -------------------
------------------------
State = ---------
Date 1 = ------------------
Date 2 = --------------------
Date 3 = -----------------------
Date 4 = -----------------------
Date 5 = ----------------------
Trust 1 = -------------------------------------------------------
------------------------
Trust 2 = -------------------------------------------------------------
----------------------------------------
------------------------
Trust 3 = -------------------------------------------------------------
----------------------------------------
------------------------
A = ------------------------
Dear -------------:
This letter responds to a letter dated June 10, 2025, and subsequent
correspondence, submitted on behalf of X by X's 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 1 on Date 2. Trust 1 was treated under subpart E of
part I of subchapter J of chapter 1 of the Code as owned by A. Thus, Trust 1 was an
eligible shareholder of X under § 1361(c)(2)(A)(i). A died on Date 3. Under
§ 1361(c)(2)(A)(ii), Trust 1 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 1 continued to hold shares of X stock. On Date 5, all the shares of X were
transferred in certain proportion to Trust 2 and Trust 3.
X represents that Trust 1 was eligible to make a Qualified Subchapter S Trust
(QSST) election under § 1361(d) effective Date 4. X also represents that Trust 2 and
Trust 3 were eligible to make QSST elections under § 1361(d) effective Date 5.
However, the beneficiary of Trust 1, Trust 2, and Trust 3 failed to make timely QSST
elections for the trusts to be eligible S corporation shareholders. Thus, Trust 1 became
an ineligible shareholder of X on Date 4, and Trust 2 and Trust 3 became ineligible
shareholders of X on Date 5. Accordingly, the failure to make a QSST election caused
X's S corporation election to terminate on Date 4.
X represents that X and its shareholders have filed all federal income tax returns
consistently with the treatment of X as an S corporation. Further, X represents that all
income with respect to the stock of X held by Trust 1, Trust 2 and Trust 3 was
consistently reported by the beneficiary of each trust on the beneficiary's federal income
tax returns as if the QSST elections had been in effect for Date 4 and Date 5. 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) 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
one class of stock.
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.
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(d)(2)(B) provides that any termination under
§ 1362(d)(2) shall be effective on and after the date of cessation.
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 1 became an ineligible
shareholder due to the failure to make a timely QSST election and would have
terminated on Date 5 when Trust 2 and Trust 3 became ineligible shareholders of X for
the same reason, if it had not already terminated on Date 4. 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 effective Date 4 and thereafter, provided that X's S
corporation election was valid and has not otherwise terminated under § 1362(d) for
reasons not addressed in this letter. Further, Trust 1, will be treated as a QSST from
Date 4, and Trust 2 and Trust 3 will be treated as QSSTs from Date 5, provided that the
trusts meet the requirements of § 1361(d)(3).
This ruling is contingent on the beneficiary of the trusts filing within 120 days from
the date of this letter a QSST elections for Trust 1 effective Date 4, and for Trust 2 and
Trust 3 effective Date 5 with the appropriate service center. A copy of this letter should
be attached to each 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 the eligibility of Trust 1,
Trust 2 and Trust 3 to be QSSTs.
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
cc: ----------------------------
----------------------------------------
------------------------
---------------------------------
----------------------------------
----------------------------------------
---------------------------------------------
--------