IRS written determination 202634002

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 202634002
Release Date: 8/21/2026
Index Number: 1362.00-00, 1362.01-00,
1362.01-02, 1362.02-00,
1362.02-02, 1362.04-00,
1362.01-01

--------------------------------------------
-----------------------------------
--------------------------------------
--------------------------
---------------------------

Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
---------------------------, ID No. ---------------
-----------------
Telephone Number:
---------------------
Refer Reply To:
CC:PTE:01
PLR-104785-26
Date:
May 28, 2026

LEGEND

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

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

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

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

A = --------------------
----------------------------------------------------

B = ---------------------
-------------------------

Year 1 = -------

Year 2 = -------

Year 3 = -------

PLR-104785-26

2
Dear ---------------:

This letter responds to a letter dated February 11, 2026, and subsequent
correspondence, submitted on behalf of X by its authorized representatives, requesting
a ruling under § 1362(f) of the Internal Revenue Code (the Code).

FACTS

The information submitted states that X is a limited liability company formed
under the laws of State on Date 1. Effective Date 2, X filed Form 2553, Election by a
Small Business Corporation, for X to be treated as an S corporation. However,
X represents that it did not obtain all of the shareholder consents required by § 1.1362-6
of the Income Tax Regulations, resulting in an ineffective election. Specifically, the
spouse of X’s shareholder A, who was located in a community property state at the time
of the election, failed to properly consent to X’s S corporation election. In addition, X’s
operating agreement included provisions relevant to treating X as a partnership for
federal income tax purposes. X represents that certain provisions of its operating
agreement inadvertently created a second class of stock, which is an independent
reason that its S election was ineffective. X also made disproportionate distributions to
B from Year 1 through Year 2, which would have caused the S election to terminate if it
has been in effect. In addition, X did not allocate its income and other tax items pro rata
among its shareholders from Year 1 through Year 3.

X represents that it executed an amended operating agreement that eliminated
the provisions that caused X to have more than one class of stock. B will make
certain true-up payments to A in amounts designed to correct the disproportionate
distributions to B that occurred between Year 1 and Year 2.

X represents that the invalid S election was inadvertent and was not motivated by
tax avoidance or retroactive tax planning, and that X and its shareholders consistently
treated X as being an S corporation. Further, X and its shareholders agree to make any
adjustments required as a condition of obtaining relief for the invalidity or termination
of X’s election as provided under § 1362(f) that may be required by the Secretary.

LAW AND ANALYSIS

Section 1362(a) of the Code 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 1361(a)(1) defines an “S corporation” as a small business corporation for
which an election under § 1362(a) is in effect for the taxable year.

PLR-104785-26

3
Section 1362(a)(2) provides that an election to be an S corporation shall be valid
only if all persons who are shareholders in such corporation on the day on which such
election is made consent to such election.

Section 1.1362-6(a)(2)(i) provides that the election to be an S corporation is not
valid unless all shareholders of the corporation at the time of the election consent to the
election in the manner provided in § 1.1362-6(b).

Section 1.1362-6(b)(2)(i) provides that when stock of the corporation is owned by
spouses as community property (or the income from the stock is community property),
each person having a community interest in the stock or income therefrom must
consent to the election.

Section 1361(b)(1) provides that a small business corporation means a domestic
corporation which is not an ineligible corporation for such year and which does not,
among other limitations, have more than one class of stock.

Section 1.1361-1(1)(1) provides, in part, that a corporation is generally treated as
having only one class of stock if all outstanding shares of stock of the corporation confer
identical rights to distribution and liquidation proceeds.

Section 1.1361-1(1)(2)(i) provides that the determination of whether all
outstanding shares of stock confer identical rights to distribution and liquidation
proceeds is made based on the corporate charter, articles of incorporation, bylaws,
applicable state laws, and binding agreements relating to distribution and liquidation
proceeds (collectively, “governing provisions”).

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be
terminated whenever (at any time on or after the first day of the first taxable year for
which a corporation is an S corporation) such corporation ceases to be a small business
corporation. Section 1362(d)(2)(B) provides that the termination shall be effective on
and after the date of cessation.

Section 1362(f) provides, in pertinent part, that if (1) an election under
§ 1362(a) by any corporation was not effective for the taxable year for which made
(determined without regard to § 1362(b)(2)), by reason of a failure to meet the
requirements of § 1361(b), or terminated under § 1362(d)(2) or (3), (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 event
resulting in the ineffectiveness or termination, steps were taken (A) so that the
corporation for which the election was made or the termination occurred is a small
business corporation, and (4) the corporation, and each person who was a shareholder
of the corporation at any time during the period specified pursuant to § 1362(f), agrees
to make such 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,

PLR-104785-26

4
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 on the facts submitted and the representations made, we first conclude
that X’s S corporation election was ineffective because the required shareholder
consents to the election were not obtained, and because provisions contained in X’s
operating agreement caused X to have more than one class of stock. We further
conclude that, even if X’s S election was not ineffective on Date 2, it would have
terminated in years Year 1 through Year 2 due to disproportionate distributions made by
X. However, we also conclude that the ineffectiveness of X’s S corporation election,
and the subsequent terminations of X’s S corporation election that would have occurred
due to the disproportionate distributions, were inadvertent within the meaning of
§ 1362(f). Pursuant to the provisions of § 1362(f), X will be treated as an S corporation
from Date 2, provided X’s S corporation election was otherwise effective and not
terminated under § 1362(d).

As a condition to this ruling, any current or former spouse of a current or former
shareholder required by § 1.1362-6 to sign X’s Form 2553 that did not do so must sign a
written statement as described in § 1.1362-6(b)(1) consenting to X's S corporation
election effective Date 2. The written statement(s) must be filed with the appropriate
service center within 120 days from the date of this letter, indicating that the
statement(s) are to be associated with X’s originally filed Form 2553.

This ruling is also contingent on X amending its tax returns for all open years
to allocate all tax items pro rata to each of its shareholders and X’s shareholders
amending their tax returns for all open years to take into account such allocations.

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. Specifically, we express or imply no opinion regarding whether X was otherwise
eligible to be an S corporation.

This ruling is directed only to the taxpayer that requested it. According to
§ 6110(k)(3), this ruling may not be used or cited as precedent.

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.

PLR-104785-26

5
Pursuant to a power of attorney on file with this office, we are sending a copy of
this letter to your authorized representatives.

Sincerely,

________________________________
Laura C. Fields
Chief, Branch 1
Office of the Associate Chief Counsel
(Passthroughs, Trusts, and Estates)

Enclosure
Copy for § 6110 purposes

cc:

----------------
-------------------
--------------------------------------------
-------------------------
---------------------------

--------------------
-------------------
-------------------------
---------------------------------------
-------------------------
---------------------------

----------------------------------
-----------------------------------
------------------------

----------------------------------
-----------------------------------------
-----------