IRS written determination 202624006

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: 202624006
Release Date: 6/12/2026
Index Number: 1362.00-00, 1362.04-00

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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PT&E:B03
PLR-119999-25
Date:
March 11, 2026

Legend

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

Y = ------------------

A = ----------------------
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Sub = ----------------------------------

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

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

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

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

Date 4 = ----------------------

Date 5 = --------------------

Date 6 = --------------------

Date 7 = --------------------

Date 8 = -----------------------

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Date 9 = ----------------------

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

This letter responds to a letter dated October 15, 2025, submitted on behalf of X,
requesting a ruling under § 1362(f) of the Internal Revenue Code (Code).

FACTS

According to the information submitted, Y was organized as a limited liability
company under the laws of State on Date 1. A was the sole member of Y on Date 1. On
Date 2, Y adopted an operating agreement that contained non-identical governing
provisions and references to more than one class of stock, including provisions
providing for the maintenance of capital accounts in accordance with § 704(b), special
allocations, the issuance of profits interests, and other provisions in contemplation of Y
being treated as a partnership for federal income tax purposes. Additionally, on Date 3,
Y adopted an equity incentive plan and made various awards of profits interests under
the plan.

Y elected to be an S corporation effective Date 4. However, Y was ineligible to be
an S corporation because the terms of Y’s operating agreement and the award
agreements in effect on Date 4 caused Y to have more than one class of stock under §
1361(b)(1)(D). Thus, Y’s S corporation election was ineffective on Date 4.

In contemplation of the sale of Y to an unrelated third party, Y discovered that the
terms of its operating agreement and the various profits interest awards caused Y’s S
corporation election to be ineffective. Accordingly, Y amended its operating agreement
on Date 5 to remove the partnership and profits interests provisions and to provide that
all shares of its stock confer identical distribution and liquidation rights. In addition, Y
cancelled the profits interest awards.

In conjunction with and as a condition of the sale of Y, A formed and organized
X, a State corporation, on Date 6. X elected to be treated as an S corporation effective
Date 6. On Date 7, in a transaction intended to qualify as a reorganization under
§ 368(a)(1)(F), A transferred all its interests in Y to X. X filed an election to treat Y as a
qualified subchapter S subsidiary (“QSub”) effective Date 7. However, X’s election to
treat Y as a QSub was ineffective because Y was not a corporation (as defined in
§ 301.7701-2(b) of the Procedure and Administration Regulations) on Date 7 due to the
ineffectiveness of its original S election (including the deemed election to be classified
as an association taxable as a corporation under § 301.7701-3(c)(1)(v)(C)).Therefore, Y
failed to meet all the requirements of § 1361(b)(3)(B) at the time the election was made
and for all periods for which the election was to be effective.

On Date 8, Y merged with and into Sub, a wholly owned subsidiary of X, with
Sub surviving. On Date 9, X sold all its interests in Sub to an unrelated third party.

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X represents that the circumstances resulting in the ineffectiveness of Y’s S
corporation election and X’s election to treat Y as a QSub were inadvertent and were
not motivated by tax avoidance or retroactive tax planning. Additionally, X represents
that, for the period Y filed as an S corporation (from Date 4 to Date 7), Y and its
shareholders have filed all federal tax returns consistent with Y’s status as an S
corporation. Further, X represents that all tax returns filed for the period from Date 7
through Date 8 were filed consistent with Y being treated as a QSub effective Date 7.
Finally, X and its shareholders have agreed to make any adjustments (consistent with
the treatment of Y as an S corporation) as may be required by the Secretary.

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 1361(b)(3)(A) provides that, except as provided in regulations prescribed
by the Secretary, for purposes of the Code, (i) a corporation which is a QSub shall not
be treated as a separate corporation, and (ii) all assets, liabilities, and items of income,
deduction, and credit of a QSub shall be treated as assets, liabilities, and such items (as
the case may be) of the S corporation.

Section 1361(b)(3)(B) provides that the term “QSub” means any domestic
corporation which is not an ineligible corporation (as defined in § 1361(b)(2)), if (i) 100
percent of the stock of such corporation is held by the S corporation, and (ii) the S
corporation elects to treat such corporation as a QSub.

Section 1.1361-1(l)(1) of the Income Tax Regulations 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).

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Section 1.1361-3(a)(1) provides that the corporation for which a QSub election is
made must meet all the requirements of § 1361(b)(3)(B) at the time the election is made
and for all periods for which the election is to be effective.

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 1st day of the 1st 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)
or § 1361(b)(3)(B)(ii) 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); (2) the Secretary determines that the circumstances
resulting in the ineffectiveness were inadvertent; (3) no later than a reasonable period of
time after discovery of the circumstances resulting in the ineffectiveness, steps were
taken so that the corporation for which the election was made is a small business
corporation or a QSub, as the case may be; and (4) the corporation for which the
election was made, 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 or a QSub, as the
case may be) as may be required by the Secretary for that period, then, notwithstanding
the circumstances resulting in such ineffectiveness, the corporation will be treated as an
S corporation or a QSub, 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
Y’s S corporation election was ineffective on Date 4 because Y had more than one
class of stock under § 1361(b)(1)(D). We conclude, however, that the circumstances
resulting in the ineffectiveness were inadvertent within the meaning of § 1362(f).
Therefore, under § 1362(f), Y will be treated as an S corporation from Date 4 to Date 7,
provided Y’s S corporation election was otherwise valid and was not otherwise
terminated under § 1362(d).

In addition, we conclude that X’s election to treat Y as a QSub effective Date 7
was ineffective because Y did not meet all the requirements of § 1361(b)(3)(B) at the
time the election was made and for all periods for which the election was to be effective.
However, we conclude that the circumstances resulting in the ineffectiveness of the
QSub election were inadvertent within the meaning of § 1362(f). Therefore, under the
provisions of § 1362(f), Y will be treated as a QSub from Date 7 to Date 8, provided that

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the QSub election was otherwise valid and was not otherwise terminated under
§ 1361(b)(3)(C).

Except as specifically ruled upon 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 whether X is a valid S corporation, whether Y was otherwise
eligible to be an S corporation, whether Y is eligible to be, or was a valid, QSub, or the
validity of the reorganization under § 368(a)(1)(F) or its tax consequences.

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

Sincerely,

Associate Chief Counsel
(Passthroughs, Trusts, and Estates)

Brian J. Barrett

By: _____________________________________
Brian J. Barrett
Senior Technician Reviewer, Branch 3
Office of the Associate Chief Counsel
(Passthroughs, Trusts, and Estates)

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Enclosure:
Copy of this letter for § 6110 purposes

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