Missing ESBT election does not defeat intended S corporation status

Plain-English summary

A trust owned shares of a corporation from the date the corporation intended its S election to begin, but the trustee failed to timely elect electing small business trust status. The omission made the trust an ineligible shareholder and caused the corporation's S election to be ineffective. The corporation consistently filed as an S corporation, represented that the trust otherwise satisfied the ESBT requirements, and said the failure was inadvertent rather than motivated by tax avoidance or retroactive planning. The corporation and its shareholders agreed to make any required adjustments. The IRS granted relief under § 1362(f) and treated the corporation as an S corporation from the intended date. The relief is contingent on the trustee filing the ESBT election within 120 days, and the IRS did not decide whether the corporation or trust otherwise qualified.

Ruling snapshot

• Question: Can a corporation retain intended S status when its shareholder trust failed to timely elect ESBT treatment?
• Outcome: Approved, contingent on filing the ESBT election within 120 days.
• Key authorities: IRC §§ 1361, 1362(d), 1362(f); Treas. Reg. § 1.1361-1(m).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202517002 Third Party Communication: None
Release Date: 4/25/2025 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
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----------------------------------------------------- Telephone Number:
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-------------------------------------- Refer Reply To:
CC:PT&E:B3
PLR-113167-24
Date:
January 21, 2025

                                                LEGEND

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

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

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

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

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

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

  This responds to a letter dated June 7, 2024 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. X elected to be treated as an S corporation effective Date 2. Trust was
treated for federal tax purposes as the owner of shares of X as of Date 2. However, the
trustee 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 under § 1361(e)(3) effective Date 2. However, because the trustee of Trust failed
to make the ESBT election, Trust became an ineligible shareholder of X on Date 2. The
PLR-113167-24 2

failure to make the ESBT election caused X’s election to be treated as an S corporation
to be ineffective on Date 2.

   X represents that it filed income tax returns consistent with having an S

corporation election for all taxable years since Date 2. X represents that Trust met the
requirements of an ESBT within the meaning of § 1361(e) for all taxable years since
Date 2, except that the trustee of Trust did not make a timely ESBT election under
§ 1361(e)(3).

   X represents that the failure to file the ESBT election was inadvertent and not

motived by tax avoidance or retroactive tax planning. X and all its shareholders agree
to make any adjustments required by the Secretary as a condition for obtaining relief for
an ineffective election 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 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)(v) provides that, for purposes of § 1361(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
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 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
PLR-113167-24 3

corporation files its income tax return, a statement that meets the requirements of
§ 1.1361-1(m)(2)(ii).

   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) 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 was ineffective because the trustee of Trust failed to timely
file an ESBT election under § 1361(e)(3) effective Date 2. We further conclude that the
ineffectiveness of X's S corporation election was inadvertent within the meaning of
§ 1362(f). Accordingly, X will be treated as 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 ruling is contingent on the trustee of Trust filing an ESBT election for Trust

effective Date 2 with the appropriate service center within 120 days from the date of this
letter and attaching a copy of this letter to the ESBT election.

   Except as specifically ruled above, we express or imply no opinion concerning

the federal tax consequences of the facts discussed or referenced in this letter under
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any other provision of the Code. Specifically, we express or imply no opinion on X’s
eligibility to be an S corporation or Trust’s eligibility to be an ESBT.

   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 X’s authorized representatives.

                                             Sincerely,




                                             Robert D. Alinsky
                                             Branch Chief, Branch 3
                                             Office of the Associate Chief Counsel
                                             (Passthroughs, Trusts, and Estates)

Enclosure:
Copy of this letter for § 6110 purposes
PLR-113167-24 5

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