When two shareholder trusts stopped being grantor trusts and missed their QSST elections, the S corporation's termination was inadvertent and its status is restored

Plain-English summary

An S corporation can only have certain kinds of shareholders. A trust qualifies if
it is a grantor trust (treated as owned by an individual) or if its beneficiary
files a "Qualified Subchapter S Trust" (QSST) election. Here, two trusts held shares
in an S corporation and originally qualified as grantor trusts. When they later
stopped being grantor trusts, each one needed a QSST election to keep being an
eligible shareholder, but those elections were never filed on time. That made the
trusts ineligible shareholders and automatically terminated the company's S election
on that date. The company kept filing as an S corporation. It asked the IRS for
relief under Section 1362(f), which lets the IRS forgive an inadvertent termination.
The IRS found the lapse inadvertent and ruled the company continues to be treated as
an S corporation, provided the trust beneficiaries file their QSST elections
(effective back to the date the trusts became ineligible) within 120 days. If that
condition is not met, the relief is void.

Ruling snapshot

• Question: Was the S election's termination (caused by two trusts ceasing to be grantor trusts without timely QSST elections) inadvertent, so S corporation status can be restored?
• Outcome: Approved (inadvertent-termination relief under § 1362(f), conditioned on 120-day QSST filings)
• Key authorities: IRC § 1361(b)(1), § 1361(c)(2), § 1361(d) (QSST); § 1362(d)(2); § 1362(f)

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202550028                                             Third Party Communication: None
 Release Date: 12/12/2025                                      Date of Communication: Not Applicable
 Index Number: 1362.00-00, 1362.02-00,
               1362.04-00                                      Person To Contact:
                                                               --------------------, ID No. -----------------
 ----------------------------------                            Telephone Number:
 ------------------------------                                -------------------
 ----------------------------                                  Refer Reply To:
 -------------------------                                     CC:PT&E:B01
                                                               PLR-111477-25
                                                               Date:
                                                               July 24, 2025




                                                   LEGEND

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

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

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

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


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

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

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



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

This responds to a letter dated October 31, 2024, submitted on behalf of X by X' s
authorized representative, requesting relief under section 1362(f) of the Internal
Revenue Code (the Code).
PLR-111477-25                                2

                                         FACTS

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

Trust 1 and Trust 2 acquired shares of X stock on Date 2. Prior to Date 3, X represents
that Trust 1 and Trust 2 qualified as grantor trusts under subpart E of part I of
subchapter J of Chapter 1 of the Code. On Date 3, Trust 1 and Trust 2 ceased to be
grantor trusts. X represents that Trust 1 and Trust 2 were each eligible to be a qualified
subchapter S trust (QSST) under § 1361(d); however, timely QSST elections were not
made. Trust 1 and Trust 2 became ineligible shareholders of X on Date 3 which caused
X's S corporation election to terminate on Date 3.

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. Additionally, X represents that X and its shareholders filed all returns
consistent with X's status as an S corporation. 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.

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(c)(2)(A)(i) provides that for purposes of § 1361(b)(1)(B), 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 a shareholder of an S
corporation. Section 1361(c)(2)(B)(i) provides that for purposes of § 1361(b)(1), in the
case of a trust described in § 1361(c)(2)(A)(i), the deemed owner shall be treated as the
shareholder.

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
PLR-111477-25                                 3

trust described in § 1361(c)(2)(A)(i), (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.

                                      CONCLUSION

Based solely on the facts submitted and representations made, we conclude that X's S
corporation election terminated on Date 3 when Trust 1 and Trust 2 became ineligible
shareholders. 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 or beneficiaries of Trust 1 and Trust 2 filing
QSST elections with the appropriate service center within 120 days from the date of this
letter effective Date 3.
PLR-111477-25                                            4

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 1 and Trust 2 to be treated
as QSSTs.

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,


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



Enclosure
Copy for § 6110 purposes

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