Inadvertently invalid S-corporation election excused after an ineligible LLC held shares

Plain-English summary

A corporation elected to be taxed as an S corporation, but the election was invalid from the start because one of its shareholders was an LLC taxed as a partnership. S corporations may only have certain shareholders (generally individuals, estates, and specific trusts), and a partnership is not permitted, so having that owner made the election ineffective. The improper owner later transferred its entire interest to a trust. The corporation asked the IRS for relief under section 1362(f), which lets the IRS treat an invalid S election as valid if the defect was inadvertent, was corrected within a reasonable time, and everyone agrees to make any adjustments the IRS requires. The IRS found the failure inadvertent and ruled that the corporation will be treated as an S corporation from the original effective date onward, as long as the election was otherwise valid and has not terminated. The IRS did not opine on whether the corporation was otherwise eligible to be an S corporation.

Ruling snapshot

• Question: Was the invalid S-corporation election inadvertent, so the company can still be treated as an S corporation under section 1362(f)?
• Outcome: Approved (inadvertent ineffectiveness relief granted)
• Key authorities: IRC §§ 1361(b)(1)(B), 1362(a), 1362(f)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202552008 Third Party Communication: None
Release Date: 12/26/2025 Date of Communication: Not Applicable
Index Number: 1361.01-02, 1362.00-00,
1362.01-00 Person To Contact:
----------------------------, ID No. --------------
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----------------------- Refer Reply To:
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PLR-108958-25
Date:
September 29, 2025

                                              LEGEND

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

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

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

State = --------

A = ------------------------------------------------------------------------------
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Trust = ------------------------------------------------------------------------------
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Dear --------------:

This responds to a letter dated April 3, 2025, and subsequent correspondence,
submitted on behalf of X by X's authorized representatives requesting relief under
§ 1362(f) of the Internal Revenue Code (the Code).
PLR-108958-25 2

                                     FACTS

According to the information submitted, X was incorporated on Date 1, under the laws of
State. X elected to be treated as an S corporation effective Date 2. A, a limited liability
company classified as a partnership for federal tax purposes, held shares in X on Date

2. Because A was an ineligible shareholder under § 1361(b)(1)(B), X's S election was
   ineffective. On Date 3, A distributed its entire interest in X to Trust.

X represents that the circumstances resulting in the ineffectiveness of its S corporation
election were inadvertent and not motivated by tax avoidance or retroactive tax
planning. X further represents that it has filed its federal tax returns consistent
with X being an S corporation effective Date 2. X and its shareholders agree to make
any adjustments (consistent with the treatment of X as an S corporation) as may be
required by the Secretary under § 1362(f).

                               LAW & ANALYSIS

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.

Section 1361(b)(1)(B) provides that a small business corporation cannot 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 1362(a)(1) 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 1362(b)(1) provides that an election under § 1362(a) may be made by a small
business corporation for any taxable year (A) at any time during the preceding taxable
year, or (B) at any time during the taxable year and on or before the 15th day of the
third month of the taxable year.

Section 1362(f) provides, in 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
to obtain shareholder consents, (2) the Secretary determines that the circumstances
resulting in such ineffectiveness were inadvertent, (3) no later than a reasonable period
of time after discovery of the circumstances resulting in the ineffectiveness steps were
taken - (A) so that the corporation is a small business corporation, or (B) to acquire the
required shareholder consents, 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,
PLR-108958-25 3

such corporation shall be treated as an S corporation during the period specified by the
Secretary.

                                  CONCLUSION

Based on the facts submitted and the representations made, we conclude that X's S
corporation election was ineffective due to the ownership of shares by an ineligible
shareholder. However, we conclude the ineffectiveness of X's S corporation election
was inadvertent within the meaning of § 1362(f). Accordingly, pursuant to the
provisions of § 1362(f), X will be treated as an S corporation from Date 2 and thereafter,
provided X's S corporation election was valid and has not otherwise terminated under
§ 1362(d).

Except as specifically ruled upon above, we express or imply no opinion concerning the
federal tax consequences of the facts described above under any other provision of the
Code. Specifically, we express or imply no opinion regarding whether X was or is
otherwise eligible to be an S corporation.

This ruling is directed only to the taxpayer who requested it. Pursuant 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 the power of attorney on file with this office, we are sending a copy of this
letter to your authorized representative.

                                  Sincerely,



                                  _____________________
                                  Caroline E. Hay
                                  Senior Technician Reviewer, Branch 1
                                  Office of the Associate Chief Counsel
                                  (Passthroughs, Trusts, and Estates)

Enclosure:
Copy for § 6110 purposes
PLR-108958-25 4

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