Inadvertent trust election defects did not end S corporation status

Plain-English summary

An S corporation’s stock passed through a family trust and later to four related trusts after the original income beneficiary died. The trustees tried to elect electing small business trust status, but their election statements omitted several potential current beneficiaries. Those defects caused the corporation’s S election to terminate when the original trust’s temporary eligibility expired and would have caused additional terminations when stock moved to the other trusts. The IRS found the terminations inadvertent because the omissions were not motivated by tax avoidance, the parties consistently filed as though S and ESBT status continued, and they agreed to required adjustments. The corporation will therefore remain an S corporation if the trustees file corrected retroactive ESBT elections within 120 days and the S election was otherwise valid.

Ruling snapshot

• Question: Can an S corporation receive inadvertent-termination relief when attempted ESBT elections omitted potential current beneficiaries?
• Outcome: Approved
• Key authorities: IRC §§ 1361(c), (d), (e), 1362(d), (f); Treas. Reg. § 1.1361-1(j), (m)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 202549013
Release Date: 12/5/2025
Index Number: 1362.00-00, 1362.01-00,
1362.01-02, 1362.02-00,
1362.02-02, 1362.04-00

Third Party Communication: None
Date of Communication: Not Applicable

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

Telephone Number:

Refer Reply To:
CC:PTE:01
PLR-112730-25

Date:
July 21, 2025

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LEGEND

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

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

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

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

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

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

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

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

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

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

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

PLR-112730-25 2

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

Trust 1 = -----------------------------------------------------------------------------------------

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Trust 2 = -----------------------------------------------------------------------------------------

Trust 3 = -----------------------------------------------------------------------------------------

Trust 4 = -----------------------------------------------------------------------------------------

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Trust 5 = -----------------------------------------------------------------------------------------

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

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

FACTS

The information submitted states that X was incorporated under the laws of State
on Date 1. X elected to be an S corporation effective on Date 2. A owned X stock. On
Date 3, A died. On Date 4, A’s estate transferred A’s X stock to Trust 1 for the benefit
of B during her life. Trust 1 made a qualified subchapter S trust (QSST) election
effective Date 4.

On Date 5, B died. Trust 1 continued as a trust but ceased to be a QSST. X
represents that, at all times since Date 6, Trust 1 has been qualified to be an electing
small business trust (ESBT). The trustee of Trust 1, despite timely attempting to make
an ESBT election effective Date 6, inadvertently omitted several potential current
beneficiaries. Specifically, if Trust 1 were an ESBT on Date 6, Trust 2, Trust 3, Trust 4,

PLR-112730-25 3

and Trust 5 would have been distributee trusts with respect to Trust 1 under § 1.1361-
1(m)(1)(ii)(B) of the Income Tax Regulations. Trust 1’s ESBT election correctly listed
one potential current income beneficiary of Trust 2 and Trust 4 but failed to list that the
children of that person, and correctly listed one potential current income beneficiary of
Trust 3 and Trust 5 but failed to list that the children of that person.

Under § 1.1361-1(j)(7)(ii), Trust 1 remained an eligible shareholder through Date
7, two years after Trust 1 ceased to be a QSST on Date 5. X’s S corporation election
terminated on Date 7, because an ESBT election was not made for Trust 1.

On Date 8, Trust 1 transferred some of its X stock to Trust 2 and Trust 4. X
represents that, at all times since Date 8, Trust 2 and Trust 4 have been qualified to be
ESBTs. The trustees of Trust 2 and Trust 4, despite timely attempting to make ESBT
elections effective Date 8, inadvertently omitted several potential current beneficiaries.
Specifically, Trust 2’s and Trust 4’s ESBT elections correctly listed one potential current
income beneficiary of Trust 2 and Trust 4, but failed to list that the children of that
person.

On Date 9, Trust 1 transferred its remaining X stock to Trust 3 and Trust 5. X
represents that, at all times since Date 9, Trust 3 and Trust 5 have been qualified to be
ESBTs. The trustee of Trust 3 and Trust 5, despite timely attempting to make ESBT
elections effective Date 9, inadvertently omitted several potential current beneficiaries.
Specifically, Trust 3’s and Trust 5’s ESBT elections correctly listed one potential current
income beneficiary of Trust 3 and Trust 5, but failed to list that the children of that
person.

X represents that the failures to make valid ESBT elections for Trust 1, Trust 2,
Trust 3, Trust 4, and Trust 5 were inadvertent and not motivated by tax avoidance or
retroactive tax planning. X represents that it and its shareholders have filed all returns
consistent with X’s status as an S corporation, that Trust 1 has filed all returns
consistent with its status as an ESBT effective Date 6, that Trust 2 and Trust 4 have
filed all returns consistent with their status as ESBTs effective Date 8, and that that
Trust 3 and Trust 5 have filed all returns consistent with their status as ESBTs effective
Date 9. Further, X and its shareholders agree to make any adjustments required as a
condition of obtaining relief for the termination of X's election as provided under
§ 1362(f) of the Code that may be required by the Secretary.

LAW AND ANALYSIS

Section 1362(a) of the Code 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 1361(a)(1) defines an “S corporation” as a small business corporation for
which an election under § 1362(a) is in effect for the taxable year.

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Section 1361(b)(1) provides that a small business corporation means a domestic
corporation which is not an ineligible corporation for such year and which does not,
among other limitations, 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.

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(d)(1) provides that, in the case of a QSST with respect to which a
beneficiary makes an election under § 1361(d)(2), such trust shall be treated as a trust
described in § 1361(c)(2)(A)(i) and 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
the S corporation with respect to which the election under § 1361(d)(2) is made.

Section 1361(d)(3) defines a QSST as a trust 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. In addition, the terms of
the trust must 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 the
termination of the trust during the life of the current income beneficiary, the trust shall
distribute all of its assets to such beneficiary.

Section 1.1361-1(j)(7)(ii) of the Income Tax Regulations provides that if, upon the
death of an income beneficiary of a QSST, the trust continues in existence, continues to
hold S corporation stock but no longer satisfies the QSST requirements, is not a
qualified subpart E trust, and does not qualify as an ESBT, then, solely for purposes of
§ 1361(b)(1), as of the date of the income beneficiary’s death, the estate of that income
beneficiary is treated as the shareholder of the S corporation with respect to which the
income beneficiary made the QSST election. The estate ordinarily will cease to be
treated as the shareholder for purposes of § 1361(b)(1) upon the earlier of the transfer
of that stock by the trust or the expiration of the 2–year period beginning on the day of
the income beneficiary’s death. During the period that the estate is treated as the
shareholder for purposes of § 1361(b)(1), the trust is treated as the shareholder for
purposes of §§ 1366, 1367, and 1368. If, after the 2–year period, the trust continues to
hold S corporation stock and does not otherwise qualify as a permitted shareholder, the
corporation’s S election terminates. If the termination is inadvertent, the corporation
may request relief under § 1362(f).

Section 1361(c)(2)(A)(v) provides that, for purposes of § 1362(b)(1)(B), an ESBT
is a permitted shareholder of an S corporation.

PLR-112730-25 5

Section 1361(e)(1)(A) provides that the term ESBT means any trust if (i) such
trust does not have as a beneficiary any person other than an individual, an estate, or a
qualifying charitable organization, (ii) no interest in the 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.

Section 1.1361-1(m)(2)(i) provides in part that the trustee of an ESBT 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).

Section 1.1361-1(m)(2)(ii) provides in part that the election statement must
include the name, address, and taxpayer identification number of the potential current
beneficiaries.

Section 1361(e)(2) and § 1.1361-1(m)(4)(i) provide in part that a potential current
beneficiary generally is, with respect to any period, any person who at any time during
such period is entitled to, or at the discretion of any person may receive, a distribution
from the principal or income of the trust.

Section 1.1361-1(m)(4)(iv) contains the rules for determining who are the
potential current beneficiaries of an ESBT if a distributee trust becomes entitled to, or at
the discretion of any person, may receive a distribution from principal or income of an
ESBT. Section 1.1361-1(m)(1)(ii)(B) provides that in part that a distributee trust is a
trust that receives or may receive a distribution from an ESBT, whether the rights to
receive the distribution are fixed or contingent, or immediate or deferred.

Section 1.1361-1(m)(4)(iv)(B) provides that, if the distributee trust is not a trust
described in § 1361(c)(2)(A), then the distributee trust is the potential current beneficiary
of the ESBT and the corporation's S corporation election terminates.

Section 1.1361-1(m)(4)(iv)(C) provides that, if the distributee trust is a trust
described in § 1361(c)(2)(A), the persons who would be its potential current
beneficiaries if the distributee trust were an ESBT are treated as the potential current
beneficiaries of the ESBT. Section 1.1361-1(m)(4)(iv)(D) provides that, for the purposes
of § 1.1361-1(m)(4)(iv)(C), a trust will be deemed to be described in § 1361(c)(2)(A) if
such trust would qualify for a QSST election under § 1361(d) or an ESBT election under
§ 1361(e) if it owned S corporation stock.

Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be
terminated whenever (at any time on or after the first day of the first taxable year for
which a corporation is an S corporation) such corporation ceases to be a small business

PLR-112730-25 6

corporation. Section 1362(d)(2)(B) provides that the termination shall be effective on
and after the date of cessation.

Section 1362(f) provides, in pertinent 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 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 event
resulting in the ineffectiveness or termination, steps were taken (A) so that the
corporation for which the election was made or the termination occurred is a small
business corporation, 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 representations made, we conclude that
X’s S corporation election terminated on Date 7, because the trustee of Trust 1 failed to
make a valid election under § 1361(e)(3) to treat Trust 1 as an ESBT effective Date 6.
Further, if X’s S corporation election had not already terminated on Date 7, the election
would have terminated on Date 8, because the trustees of Trust 2 and Trust 4 failed to
make valid elections under § 1361(e)(3) to treat Trust 2 and Trust 4 as ESBTs effective
Date 8. Additionally, if X’s S corporation election had not already terminated on Date 7,
and did not terminate on Date 8, the election would have terminated on Date 9, because
the trustee of Trust 3 and Trust 5 failed to make valid elections under § 1361(e)(3) to
treat Trust 3 and Trust 5 as ESBTs effective Date 9. We further conclude that the
circumstances resulting in the terminations of X’s S corporation election were
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 7 and
thereafter, provided that X’s S corporation election was valid and was not otherwise
terminated under § 1362(d) for reasons not addressed in this letter.

This ruling is contingent on the trustees of Trust 1 filing within 120 days of the
date of this letter an ESBT election effective Date 6 with the appropriate service center,
the trustees of Trust 2 and Trust 4 filing within 120 days of the date of this letter ESBT
elections effective Date 8 with the appropriate service center, and the trustees of Trust 3
and Trust 5 filing ESBT elections effective Date 9 with the appropriate service center. A
copy of this letter should be attached to all required ESBT elections. If these conditions
are not met, then this ruling is null and void.

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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. Specifically, we express or imply no opinion regarding whether X was otherwise
eligible to be an S corporation or whether Trust 1, Trust 2, Trust 3, Trust 4, or Trust 5
are otherwise eligible to be shareholders or ESBTs.

This ruling is directed only to the taxpayer that requested it. According to
§ 6110(k)(3), this ruling may not be used or cited as precedent.

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.

Pursuant to a power of attorney on file with this office, we are sending a copy of
this letter to your authorized representative.

Sincerely,

_/S/___ _
Christiaan T. Cleary
Senior Technician Reviewer, Branch 1
Office of the Associate Chief Counsel
(Passthroughs, Trusts, and Estates)

Enclosure
Copy for § 6110 purposes

PLR-112730-25 8

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