IRS written determination 202627008

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: 202627008
Release Date: 7/2/2026
Index Number: 1361.01-04, 1362.00-00,
1362.02-00, 1362.02-02

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

Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
----------------------------, ID No. --------------
-----------------
Telephone Number:
---------------------
Refer Reply To:
CC:PT&E:B01
PLR-117066-25
Date:
April 01, 2026

LEGEND

X

= -----------------------------------------------------------------------------------------------
--------------------------

State

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

= ---------------------------

Date 2

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

= ------------------

Month = --------------

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

This responds to a letter dated September 22, 2025, and subsequent correspondence,
submitted on behalf of X by X’s authorized representatives, requesting relief under
§ 1362(f) of the Internal Revenue Code (the Code).

FACTS

X was organized on Date 1 under the laws of State. X elected to be treated as an S
corporation effective Date 1. On Date 2, X adopted an operating agreement that
contained terms causing X to have more than one class of stock under § 1361(b)(1)(D).
Specifically, the agreement contained provisions regarding the maintenance of capital
accounts in accordance with § 704(b) and based each member's liquidating distribution

PLR-117066-25

2
rights on their capital account balances. Thus, X’s S corporation status terminated on
Date 2. Additionally, X inadvertently made disproportionate distributions to shareholders
prior to Date 3. Subsequently, X amended its operating agreement, effective Date 3, to
reflect its intent to be treated as an S corporation, remove any language related to
capital accounts, and provide that all shares of its stock confer identical distribution and
liquidation rights. During Month, X amended certain employment tax returns to reflect
the intended treatment of the disproportionate distributions as compensation.

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 1.1361-1(l)(1) provides 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(l)(2)(i) provides, in part, 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 law, and binding agreements relating to distribution and liquidation
proceeds (collectively, governing provisions).

Section 1362(a) provides that a small business corporation may elect 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) further provides that the termination 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) or (3) or § 1361(b)(3)(C); (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

PLR-117066-25

3
which the termination occurred is a small business corporation or a qualified subchapter
S subsidiary, as the case may be; and (4) the corporation for which the election was
made or the 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 or a qualified subchapter S subsidiary, as the case may be) as may be
required by the Secretary with respect to such period, then, notwithstanding the
circumstances resulting in such termination, such corporation shall be treated as an S
corporation or a qualified subchapter S subsidiary, as the case may be, 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 due to provisions in X’s former operating
agreement that created a second class of stock. However, we conclude that the
termination of X's S corporation election was inadvertent within the meaning of
§ 1362(f). Accordingly, under § 1362(f), X will continue to be treated as an S corporation
from Date 2 and thereafter, provided that X's S corporation election was valid and has
not otherwise terminated under § 1362(d).

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 provisions of the
Code. Specifically, we express or imply no opinion as to whether X is otherwise eligible
to be an S corporation.

This ruling is directed only to the taxpayer requesting it. According to § 6110(k)(3) of the
Code, 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.

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

PLR-117066-25

4
Sincerely,

____________________________
Joy C. Spies
Senior Technician Reviewer, Branch 1
Office of Associate Chief Counsel
(Passthroughs, Trusts, and Estates)
Enclosure:
Copy for § 6110 purposes

cc: ------------------------------------------------
---------------------------
---------------------
----------------------------
---------------------------

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