IRS written determination 202625018

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: 202625018
Release Date: 6/18/2026
Index Number: 1362.04-00

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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
----------------------, ID No. -----------------
Telephone Number:
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Refer Reply To:
CC:PT&E:B03
PLR-117860-25
Date:
March 13, 2026

Legend

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

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

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

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

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

n = ---------------

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

This responds to a letter dated October 2, 2025, submitted on behalf of X by X’s
authorized representatives, requesting relief under § 1362(f) of the Internal Revenue
Code.

FACTS

The information submitted states that X was incorporated under the laws of State
on Date 1. Also on Date 1, Trust acquired 100% of the shares of X. X elected to be
treated as an S corporation effective Date 2.

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It is represented that Trust was eligible to make an Electing Small Business Trust
(ESBT) election under § 1361(e)(3), effective Date 2. However, the trustees of Trust
failed to make an ESBT election for Trust to be an eligible S corporation shareholder;
thus, Trust was an ineligible shareholder of X on Date 2. Accordingly, the failure to
make an ESBT election caused X's S election to terminate on Date 2.

X and its shareholder have filed all income tax returns consistent with having an
election to be treated as an S corporation for all taxable years since Date 1. Trust has
always met the ESBT requirements within the meaning of § 1361(e), except that the
trustees did not make a timely ESBT election under § 1361(e)(3). The failure to file an
ESBT election was inadvertent and not motivated by tax avoidance or retroactive tax
planning. X and its shareholder agree to make any adjustments required by the
Secretary as a condition of obtaining relief under the inadvertent termination rule as
provided under § 1362(f).

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 1362(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 1
class of stock.

Section 1361(c)(2)(A)(v) provides that, for the purposes of § 1362(b)(1)(B), an
electing small business trust (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 it is
made and subsequent taxable years of such trust unless revoked with the consent of
the Secretary.

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

PLR-117860-25

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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) provides that an S corporation election 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 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 was 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 circumstances resulting
in such ineffectiveness or termination, steps were taken so that the corporation for
which the election was made or termination occurred is a small business corporation;
and (4) the corporation for which the election was made or termination occurred, and
each person who was a shareholder in such corporation at any time during the period
specified pursuant to § 1362(f), agrees to make the adjustments (consistent with the
treatment of such corporation as an S corporation) as may be required by the Secretary
with respect to such period, then, notwithstanding the circumstances resulting in such
ineffectiveness or termination, such 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, because the trustees of Trust failed to
timely make an ESBT election under § 1361(e)(3). However, the ineffectiveness of X's S
corporation election was inadvertent within the meaning of § 1362(f). Accordingly, X
shall be treated as an S corporation from Date 2 and thereafter, provided its S
corporation election is not otherwise terminated under § 1362(d).

This ruling is subject to the conditions that within 120 days from the date of this
letter (1) the trustees of Trust file an ESBT election with respect to Trust, effective Date
2 with the appropriate service center and (2) X, its shareholder, and the trustees of
Trust file any necessary original or amended returns consistent with the relief granted in
this letter. A copy of this letter should be attached to the ESBT elections and any
original or amended returns.

Furthermore, as an adjustment under § 1362(f)(4), a payment of $n with a copy
of this letter within 45 days from the date of this letter must be sent to the following
address:

PLR-117860-25

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Internal Revenue Service
Kansas City Service Center
333 W. Pershing Road
Kansas City, MO 64108
Stop 7777
Attn: Manual Deposit

If the above conditions are not met, then this ruling is null and void. Also, if these
conditions are not met, X must notify the service center with which it filed its S
corporation election that its election terminated on Date 2.

Except as specifically ruled above, we express or imply no opinion concerning
the federal tax consequences of the facts described above under any other provision of
the Code and the regulations thereunder, including whether X was otherwise a valid S
corporation or whether Trust is a valid ESBT within the meaning of § 1361(e).

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 requesting 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 your authorized representative.

Sincerely,

Richard T. Probst

Richard T. Probst
Senior Technician Reviewer, Branch 3
Office of the Associate Chief Counsel
(Passthroughs, Trusts, and Estates)

Enclosure
Copy of this letter for § 6110 purposes

PLR-117860-25

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