S corporation receives inadvertent-termination relief after two shareholder defects

Plain-English summary

An S corporation's election terminated when a shareholder renounced U.S. citizenship and became ineligible to hold its stock. A later transfer of shares to a trust also would have terminated the election because the trust's beneficiary did not timely make a qualified subchapter S trust election. The first shareholder sold the shares to a U.S. citizen after the corporation learned of the problem, and the corporation and affected taxpayers reported consistently with continued S corporation treatment. The IRS found both defects inadvertent and treated the corporation as an S corporation throughout the affected period. Relief is conditioned on the trust beneficiary filing the QSST election within 120 days, effective when the trust acquired its shares.

Ruling snapshot

• Question: Was the termination of the corporation's S election caused by an ineligible shareholder and a missing QSST election inadvertent?
• Outcome: Approved, subject to filing the QSST election within 120 days
• Key authorities: IRC §§ 1361(b), 1361(d), 1362(d), 1362(f)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202549001
Release Date: 12/5/2025
Index Number: 1362.00-00, 1362.04-00,
1362.02-00

Third Party Communication: None
Date of Communication: Not Applicable

Person To Contact:
--------------------, ID No. -----------------

Telephone Number:

Refer Reply To:
CC:PSI:1
PLR-103926-25

Date:
August 26, 2025

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

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

LEGEND

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

A = ---------------------------------------------------------------------------------------
-------------------------

B = ---------------------------------------------------------------------------------------
-------------------------

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

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

Country = ----------

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

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

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

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

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

PLR-103926-25 2

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

This responds to a letter dated February 7, 2025, submitted on behalf of X by X' s
authorized representatives, requesting relief under section 1362(f) of the Internal
Revenue Code (the Code).

FACTS

X was incorporated under the laws of State on Date 1 and elected to be treated as an S
corporation, effective Date 1.

A, a shareholder of X and a dual citizen of the United States and Country, renounced
A’s United States citizenship on Date 2, making A an ineligible shareholder and causing
X’s S election to terminate on Date 2. A did not understand that the renunciation would
disqualify X from S corporation status and X did not learn that A had renounced A’s
United States citizenship until about Date 4. After being informed of this, A promptly
sold A’s shares in X to B, a United States Citizen, on Date 5.

Trust became a shareholder of X on Date 3 after the administration and settlement of a
an estate that held shares of X. X represents that at all times beginning on Date 3, Trust
met the requirements of a qualified subchapter S trust (QSST) as described in
§1361(d). However, the trustee of X failed to make the election under § 1361(d)(2) for
Trust to be treated as a QSST, which would have caused X's S corporation election to
terminate on Date 3 if it had not already terminated on Date 2.

X represents that the circumstances resulting in the termination of its S corporation
election were inadvertent and were not motivated by tax avoidance or retroactive tax
planning. X further represents that A consistently reported on A’s individual federal tax
returns all income attributable to A’s shares of X prior to Date 5. X also represents that
all income with respect to the stock of X held by Trust has been consistently reported by
Trust’s beneficiaries on their individual federal tax returns as if the QSST election for
Trust had been in effect since Date 3. Additionally, X represents that X and its
shareholders filed all returns consistent with X's status as an S corporation. Finally, X
and its shareholder agreed to make any adjustments (consistent with the treatment of X
as an S corporation) as may be required by the Secretary.

LAW AND ANALYSIS

Section 1362(a) provides that a small business corporation may elect to be an S
corporation.

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.

PLR-103926-25 3

Section 1361(b)(1)(B) provides that a “small business corporation” means 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(d)(1) provides, in part, that in the case of a QSST with respect to which a
beneficiary makes an election under § 1361(d)(2) (A) such trust shall be treated as a
trust described in § 1361(c)(2)(A)(i), and (B) for purposes of § 678(a), the beneficiary of
such trust shall be treated as the owner of that portion of the trust which consists of
stock in an S corporation with respect to which the election under § 1361(d)(2) is made.

Section 1361(d)(3) defines a QSST as a trust (A) the terms of which require that (i)
during the life of the current income beneficiary, there shall be only one income
beneficiary of the trust; (ii) any corpus distributed during the life of the current income
beneficiary may be distributed only to such beneficiary; (iii) the income interest of the
current income beneficiary in the trust shall terminate on the earlier of such beneficiary's
death or the termination of the trust; and (iv) upon termination of the trust during the life
of the current income beneficiary, the trust shall distribute all of its assets to that
beneficiary; and (B) all of the income (within the meaning of § 643(b)) of which is
distributed (or required to be distributed) currently to one individual who is a citizen or
resident of the United States.

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. A termination of
an S corporation under § 1362(d)(2) is 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); (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.

PLR-103926-25 4

CONCLUSION

Based solely on the facts submitted and representations made, we conclude that X's S
corporation election terminated on Date 2 when A renounced A’s United States
citizenship. We also conclude that if X's S corporation election had not already
terminated on Date 2, it would have terminated on Date 3 when Trust acquired shares
in X. We further conclude that the termination of X's S election was inadvertent within
the meaning of § 1362(f). Therefore, pursuant to the provisions of § 1362(f), X will be
treated as an S corporation effective Date 2 and thereafter, provided X's S corporation
election is valid and not otherwise terminated under § 1362(d).

This relief is contingent on the beneficiary of Trust filing a QSST election effective Date
3 with the appropriate service center within 120 days from the date of this letter,
attaching a copy of this letter to the QSST election.

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 provision of the Code
and the regulations thereunder. Specifically, we express or imply no opinion regarding
X's eligibility to be an S corporation or the eligibility of Trust to be treated as a QSST.

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

Sincerely,

Joy C. Spies
Senior Technician Reviewer, Branch 1
(Passthroughs & Special Industries)

Enclosure (1)
Copy of letter for § 6110 purposes

PLR-103926-25 5

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

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

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