Partnership ownership caused an inadvertent S election termination

Plain-English summary

An S corporation’s election terminated when a partnership, an ineligible S corporation shareholder, acquired all of its stock. The partnership later transferred the stock in equal shares to its two individual owners. The corporation represented that the termination was inadvertent, was not motivated by tax avoidance or retroactive planning, and that it and its shareholders would make any required adjustments. The IRS granted relief under IRC § 1362(f) and treated the corporation as continuously maintaining S status from the partnership’s acquisition date, provided the election was otherwise valid and did not otherwise terminate. The corporation and individual shareholders must file all required open-year returns consistently within 120 days.

Ruling snapshot

• Question: Was the S election termination caused by temporary ownership through an ineligible partnership inadvertent?
• Outcome: Approved, subject to consistent open-year filings within 120 days
• Key authorities: IRC §§ 1361, 1362(d), 1362(f)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202510004 Third Party Communication: None
Release Date: 3/7/2025 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
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Refer Reply To:
CC:PSI:01
PLR-110748-24
Date:
December 05, 2024

LEGEND

X = -------------------------------------
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Y = -------------------------------------
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A = -------------------------------------
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B = -------------------------------------
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State = ---------

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

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

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

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

Date 5 = ---------------------
PLR-110748-24 2

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

This letter responds to a letter dated June 5, 2024, submitted on behalf of X by its
authorized representatives, requesting a ruling 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 and elected to be taxed as an S corporation effective Date 2. Y was formed
under the laws of State on Date 3 and is treated as a partnership for Federal income tax
purposes. Y is owned in equal shares by A and B. On Date 4, Y acquired all
outstanding shares of X stock. On Date 5, Y transferred all of the X stock to A and B.

X represents that the circumstances resulting in the termination of its S corporation
election were inadvertent and not motivated by tax avoidance or retroactive tax
planning. X and its shareholders agree to make any adjustments (consistent with the
treatment of X as an S corporation) as may be required by the Secretary 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 the 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 1362(a)(1) 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 1362(b)(1) provides that an election under § 1362(a) may be made by a small
business corporation for any taxable year (A) at any time during the preceding taxable
year, or (B) at any time during the taxable year and on or before the 15th day of the
third month of the taxable year.

Section 1362(f) provides that if (1) an election under § 1362(a) by any corporation (A)
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 to obtain
PLR-110748-24 3

shareholder consents, or (B) was terminated under paragraph (2) or (3) of § 1362(d); (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 (A) so that the corporation is a small business corporation, or (B) to acquire
the required shareholder consents, 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, 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 solely on the facts submitted and the representations made, we conclude that X's
S corporation election terminated on Date 4 due to an ineligible shareholder acquiring
shares in X. We further conclude that the termination was inadvertent withing the
meaning of § 1362(f). Therefore, pursuant to the provisions of § 1362(f), X will be
treated as an S corporation from Date 4 and thereafter, provided that its S corporation
election was valid and not otherwise terminated under § 1362(d).

Further, this ruling is contingent on X and its shareholders, A and B, filing within 120
days from the date of this letter all required returns for all open years consistent with the
requested relief. A copy of this letter should be attached to any such returns.

Except as specifically ruled above, we express or imply no opinion as to the federal
income tax consequences of the facts described above under any other provision of the
Code. Specifically, we express or imply no opinion as to whether X was or is otherwise
eligible to be treated as an S Corporation.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

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.
PLR-110748-24 4

Pursuant to the 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 & Special Industries)



                                          By: ____________________________
                                              Joy C. Spies
                                              Senior Technician Reviewer, Branch 1
                                              Office of Associate Chief Counsel
                                              (Passthroughs & Special Industries)

Enclosure:
Copy for § 6110 purposes

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