Inadvertent S corporation termination excused after a trust missed its ESBT election

Plain-English summary

An S corporation's stock was transferred from one trust to a second
trust. To stay an eligible S corporation shareholder, the second trust
had to file an "electing small business trust" (ESBT) election within a
tight deadline, but the trustee missed it. Because an ineligible
shareholder held the stock, the corporation's S election automatically
terminated, which would have exposed it to corporate-level tax. The
corporation asked the IRS for relief under IRC § 1362(f), which lets the
IRS treat a terminated S election as still in effect if the termination
was inadvertent, is being fixed, and everyone agrees to make any needed
adjustments. The IRS found the termination inadvertent and granted
relief, so the corporation keeps its S status as long as the trustee
files the ESBT election within 120 days. This matters because a trust
that holds S corporation stock has to get its ESBT paperwork right, and a
missed election can silently blow the company's S status.

Ruling snapshot

• Question: Was the termination of the corporation's S election inadvertent, so that § 1362(f) relief should be granted?
• Outcome: Approved (inadvertent termination relief; ESBT election due within 120 days)
• Key authorities: IRC §§ 1362(a), 1362(d)(2), 1362(f); IRC §§ 1361(a), 1361(b)(1)(B), 1361(c)(2)(A)(v), 1361(e); Treas. Reg. § 1.1361-1(m)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202619015
Release Date: 5/8/2026
Index Number: 1362.00-00, 1362.02-00, 1362.04-00

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact:
--------------------, ID No. -----------------
Telephone Number:

Refer Reply To:
CC:PT&E:01
PLR-116244-25
Date:
February 11, 2026

LEGEND

X = ----------------------------------------------------------------
-----------------------
Trust 1 = ----------------------------------------------------------------
-----------------------
Trust 2 = ----------------------------------------------------------------
-----------------------
State = ------
Date 1 = ----------------------
Date 2 = -----------------

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

This responds to a letter dated September 3, 2025, submitted on behalf of X by X's authorized representative, requesting relief under section 1362(f) of the Internal Revenue Code (the Code).

FACTS

The information submitted states that X was incorporated under the laws of State on Date 1 and elected to be treated as an S corporation, effective Date 1.

PLR-116244-25 2

On Date 2 an interest in X was transferred from Trust 1, an Electing Small Business Trust (ESBT) under § 1361(e), to Trust 2. X represents that Trust 2 was eligible to make an election to be treated an ESBT on and after Date 2. However, the trustee of Trust 2 failed to timely make an ESBT election effective Date 2. Consequently, Trust 2 became an ineligible shareholder of X, causing X's S corporation election to terminate on Date 2.

X represents that the circumstances resulting in the termination of its S corporation election were inadvertent and were not motivated by tax avoidance or retroactive tax planning. Additionally, X represents that X and its shareholders filed all returns consistent with X's status as an S corporation. X and its shareholder agree 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 1362(a) provides that a small business corporation may elect to be an S corporation.

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 a "small business corporation" means 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 1 class of stock.

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(e)(1)(A) provides that an ESBT 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), (3), (4), or (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 all subsequent taxable years of such trust unless revoked with the consent of the Secretary.

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Section 1.1361-1(m)(2)(i) provides, in relevant part, that the trustee of the trust must make the ESBT election by signing and filing, with the service center where 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. However, if the ESBT holds stock in multiple S corporations that file in different service centers, the ESBT election must be filed with all the relevant service centers where the corporations file their income tax returns. This requirement applies only at the time of the initial ESBT election; if the ESBT later acquires stock in an S corporation which files its income tax return at a different service center, a new ESBT election is not required.

Section 1.1361-1(m)(2)(iii) provides that the trustee of an ESBT must file the ESBT election within the time requirements prescribed in § 1.1361-1(j)(6)(iii) for filing a QSST election (generally within the 16-day-and-2-month period beginning on the day that the stock is transferred to the trust).

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated whenever the corporation ceases to be a small business corporation. A termination of an S corporation under § 1362(d)(2) is 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) 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 facts submitted and representations made, we conclude that X's S corporation election terminated on Date 2, when Trust 2 became an ineligible shareholder. We further conclude that the termination of X's S election was inadvertent within the meaning of § 1362(f). Therefore, pursuant to the provisions of § 1362(f), X will be treated as an S corporation effective Date 2 and thereafter, provided X's S corporation election is valid and not otherwise terminated under § 1362(d).

This relief is contingent on the trustee(s) of Trust 2 filing an ESBT election for Trust 2 effective Date 2 with the appropriate service center within 120 days from the date of this letter, attaching a copy of this letter to the ESBT election.

PLR-116244-25 4

Except as specifically ruled 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 2 eligibility to be an ESBT.

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 ruling request, it is subject to verification on examination.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

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

Sincerely,

Christiaan T. Cleary
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: ----------------------------