IRS written determination 202632010

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: 202632010
Release Date: 8/7/2026
Index Number: 1361.00-00, 1361.03-00,
1361.03-02, 1361.03-03,
1362.00-00, 1362.02-00,
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-117874-25
Date:
May 07, 2026

LEGEND

X = ----------------------------------------
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Trust = ----------------------------------------
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State = ----------------

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

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

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

This letter responds to a letter dated September 23, 2025, submitted on behalf of
X by its authorized representatives, requesting a ruling under § 1362(f) of the Internal
Revenue Code (Code).

FACTS

According to the information submitted, X, a State corporation, elected to be an S
corporation effective Date 1. On Date 2, Trust became a shareholder of X. However,

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the trustees of Trust failed to make an Electing Small Business Trust (ESBT) election,
effective Date 2.

X represents that Trust was eligible to make an election to be treated as an
ESBT, effective Date 2. However, because the trustees of Trust failed to make an
ESBT election for Trust, Trust became an ineligible shareholder on Date 2.
Accordingly, X’s S corporation election terminated on Date 2.

X represents that the failure to file the ESBT election and the resulting
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 have filed all their federal income tax returns consistent with X having an
S corporation election in effect for all taxable years since Date 1. Further, X represents
that Trust met the requirements of an ESBT for all taxable years since Date 2.

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 with respect to
the period specified by § 1362(f).

LAW AND ANALYSIS

Section 1361(a)(1) of the Code 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 1
class of stock.

Section 1361(c)(2)(A)(i) provides that 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)(v) provides that, for purposes of § 1362(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

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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)(1)(B) provides that an ESBT does not include (i) any qualified
subchapter S trust (as described in § 1361(d)(3)) if an election under § 1361(d)(2)
applies to any corporation the stock of which is held by such trust, (ii) any trust exempt
from tax under subtitle A, and (iii) any charitable remainder annuity trust or charitable
remainder unitrust (as defined in § 664(d)).

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.

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 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.

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.

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CONCLUSION

Based solely on the facts submitted and representations made, we conclude that
X’s S corporation election terminated on Date 2, when Trust became an ineligible
shareholder. We further conclude that the termination of X’s S corporation election was
inadvertent within the meaning of § 1362(f). Therefore, pursuant to the provisions of
§ 1362(f), X will be treated as continuing to be an S corporation from Date 2 and
thereafter, provided X’s S corporation election is otherwise valid and has not otherwise
terminated under § 1362(d).

This relief is contingent on the following conditions that must be satisfied within
120 days of the date of this letter: (i) the trustees of Trust filing an ESBT election
effective Date 2 with the appropriate service center, and (ii) X and the trustees of Trust
filing 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 election and any original or
amended returns.

Except as specifically ruled upon above, we express or imply no opinion
concerning the federal tax consequences of this case under any other provision of the
Code and the regulations thereunder, including whether X is otherwise eligible to be an
S corporation or whether Trust is otherwise eligible to be an ESBT under § 1361(e).

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 requesting 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
copies of this letter to X’s authorized representatives.

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Sincerely,

Associate Chief Counsel
(Passthroughs, Trusts, and Estates)

By: _______________________________
Christiaan T. Cleary
Branch Chief, Branch 3
Office of Associate Chief Counsel
(Passthroughs, Trusts, and Estates)

Enclosure:
Copy of this letter for § 6110 purposes

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