Inadvertent invalid QSub election excused, subsidiary treated as a QSub under section 1362(f)

Plain-English summary

An S corporation acquired another S corporation as a wholly owned subsidiary and elected to treat that subsidiary as a qualified subchapter S subsidiary (a QSub), which lets the parent treat the subsidiary as if it did not exist separately for tax purposes. The election turned out to be invalid: by the time it was made, the subsidiary had already converted to an LLC and was a disregarded entity, not the corporation that QSub status requires. The parent asked the IRS for relief under section 1362(f), which lets the IRS overlook an ineffective QSub election if the failure was inadvertent, the parties fix it within a reasonable time, and everyone agrees to make any adjustments the IRS requires. The IRS concluded the failure was inadvertent and ruled that the subsidiary will be treated as a QSub from the intended effective date until the date it converted to an LLC. The IRS expressly did not opine on whether the subsidiary was otherwise eligible for QSub status or on the validity of the underlying reorganization.

Ruling snapshot

• Question: Was the invalid QSub election inadvertent, so the subsidiary can still be treated as a QSub under section 1362(f)?
• Outcome: Approved (inadvertent invalidity relief granted for the specified period)
• Key authorities: IRC §§ 1361(b)(3), 1362(f); Treas. Reg. § 1.1361-3(a)(1)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202552005 Third Party Communication: None
Release Date: 12/26/2025 Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.05-00,
1362.00-00 Person To Contact:
-----------------, ID No. -----------------
-------------------------------- Telephone Number:
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------------------------ Refer Reply To:
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PLR-107707-25
Date:
September 19, 2025

LEGEND

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

Sub = ---------------------
-----------------------

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

State 1 = -------------

State 2 = -------------

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

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

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

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

Date 5 = --------------------------
PLR-107707-25 2

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

   This letter responds to a letter dated April 1, 2025, and subsequent

correspondence, submitted on behalf of X by its authorized representative, requesting a
ruling under § 1362(f) of the Internal Revenue Code (Code).

                                      FACTS

   According to the information submitted, Sub, a State 1 corporation, elected to be

an S corporation effective Date 1. X, a State 2 corporation, elected to be an S
corporation effective Date 2. On Date 3, incident to what X represents was part of a
reorganization under § 368(a)(1)(F), Sub's sole shareholder, A, contributed all the stock
in Sub to X so that Sub became a wholly owned subsidiary of X. On Date 4, Sub
converted to a State 2 limited liability company and was treated as an entity disregarded
as separate from its owner for federal tax purposes (disregarded entity). On Date 5, X
made an election to treat Sub as a qualified subchapter S subsidiary (QSub) effective
Date 3. Subsequently, X determined that the election to treat Sub as a QSub was
ineffective because Sub did not meet the requirements of § 1361(b)(3)(B) at the time
the election was made. Specifically, Sub was a disregarded entity and not a corporation
as required under § 1361(b)(3)(B) and § 1.1361-3(a)(1) on Date 5.

    X represents that the ineffective QSub election for Sub was inadvertent and was

not the result of tax avoidance or retroactive tax planning. X further represents that no
person has filed a federal tax return inconsistently with a valid QSub election for Sub
effective Date 3. X and Sub have agreed to make any adjustments required by the
Service consistent with the treatment of Sub as a QSub effective Date 3.

                                LAW AND ANALYSIS

   Section 1361(b)(3)(A) provides that, except as provided in regulations prescribed

by the Secretary, for purposes of the Code- (i) a corporation which is a QSub shall not
be treated as a separate corporation, and (ii) all assets, liabilities, and items of income,
deduction, and credit of a QSub shall be treated as assets, liabilities, and such items (as
the case may be) of the S corporation.

  Section 1361(b)(3)(B) provides that the term "QSub" means any domestic

corporation which is not an ineligible corporation (as defined in § 1362(b)(2)), if (i) 100
percent of the stock of such corporation is held by the S corporation, and (ii) the S
corporation elects to treat such corporation as a QSub.

    Section 1.1361-3(a)(1) of the Income Tax Regulations provides that the

corporation for which a QSub election is made must meet all the requirements of §
1361(b)(3)(B) at the time the election is made and for all periods for which the election
is to be effective.
PLR-107707-25 3

   Section 1362(f) provides, in part, that if (1) an election under § 1361(b)(3)(B)(ii)

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), (2) the Secretary determines that the circumstances resulting in the
ineffectiveness were inadvertent, (3) no later than a reasonable period of time after
discovery of the circumstances resulting in the ineffectiveness, steps were taken so that
the corporation for which the election was made is a QSub, and (4) the corporation for
which the election was made, 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 a QSub) as
may be required by the Secretary with respect to such period, then, notwithstanding the
circumstances resulting in the ineffectiveness, the corporation will be treated as a QSub
during the period specified by the Secretary.

                                 CONCLUSION

   Based solely on the facts submitted and representations made, we conclude that

X's election to treat Sub as a QSub effective Date 3 was ineffective. We further
conclude that the circumstances resulting in the ineffectiveness of the QSub election
were inadvertent within the meaning of § 1362(f). Therefore, Sub will be treated as a
QSub effective Date 3 through Date 4 under § 1362(f), provided that the QSub election
was otherwise valid and not otherwise terminated under § 1361(b)(3)(C).

   Except as expressly provided herein, we express or imply no opinion concerning

the federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, we express or imply no opinion regarding whether
Sub was otherwise eligible to be treated as a QSub or the validity of the reorganization
under § 368(a)(1)(F) or its federal tax consequences.

   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 requested ruling, 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 representative.
PLR-107707-25 4

                                            Sincerely,




                                            Elizabeth V. Zanet
                                            Senior Technician Reviewer, Branch 3
                                            Office of Associate Chief Counsel
                                            (Passthroughs, Trusts, and Estates)

Enclosure:
Copy of this letter for § 6110 purposes

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