Invalid elections and terminations
An invalid election on Form 2553 never took effect because, on the day it was made, the corporation did not meet the small business corporation requirements of section 1361(b) or did not have every shareholder's consent (IRC 1362(a)(2)). A termination ends a valid election. Under 1362(d), it happens by revocation, when the corporation ceases to be a small business corporation (effective on the date it ceases), or when it has accumulated earnings and profits and more than 25% passive investment income for 3 consecutive years (effective the first day of the following year).
IRM 3.13.2.23.17 lists the conditions campus examiners treat as automatically terminating an election: no longer a domestic corporation, becoming a member of an affiliated group, issuing a second class of stock, having more than 100 shareholders, having an ineligible shareholder, having a nonresident alien shareholder, and three consecutive years of passive income. A termination mid-year splits the year. IRM 3.13.2.23.18 notes: “This can cause two short tax years.” The corporation files Form 1120-S for the S period and Form 1120 for the rest, with items allocated under 1362(e).
Relief under 1362(f) is available for invalid elections (failure to meet 1361(b) or to obtain consents) and for terminations under 1362(d)(2) or (3), and for the parallel QSub situations. It is not available to undo a voluntary revocation.
The 1362(f) test
The statute requires four things: the election was invalid or terminated for one of the covered reasons; “the Secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent”; within a reasonable period after discovery, steps were taken to make the corporation eligible again or to obtain the missing consents; and the corporation and every person who was a shareholder during the relief period agree to the adjustments the IRS requires.
Treas. Reg. 1.1362-4(b) puts the burden on the corporation: “The corporation has the burden of establishing that under the relevant facts and circumstances the Commissioner should determine that the termination or invalid election was inadvertent.” Facts that tend to show inadvertence are that the event was not reasonably within the corporation's control and not part of a plan to terminate, or that it happened without the corporation's knowledge despite due diligence.
Rev. Proc. 2022-19 recounts the legislative history: Congress intended that the IRS “be reasonable in granting waivers, so that corporations whose subchapter S eligibility requirements have been inadvertently violated do not suffer the tax consequences of a termination if no tax avoidance would result from the continued subchapter S treatment.”
Under 1.1362-4(f), relief can run for all years affected, so the corporation is treated as if the election never failed, or only from the date the corporation became eligible again, with C corporation treatment in between. Under 1.1362-4(d), the IRS may require adjustments, including treating an ineligible shareholder as a shareholder for the period it held stock and protective adjustments to prevent revenue loss, for example where the ineligible shareholder was a nonresident alien.
Problems that need no relief
Rev. Proc. 2022-19 identified six areas where practitioners were asking for rulings unnecessarily. For four of them, the IRS now says the election is unaffected and it will not rule:
| Issue | Rev. Proc. 2022-19 position |
|---|---|
| Disproportionate distributions | “the IRS will not treat any disproportionate distributions made by a corporation as violating the one class of stock requirement of § 1361(b)(1)(D) so long as the governing provisions of the corporation provide for identical distribution and liquidation rights” (sec. 3.02). The distributions still get appropriate tax effect. |
| Buy-sell, redemption, transfer restriction and certain debt arrangements with no principal purpose to circumvent the one class rule | Not treated as a second class of stock; the IRS will not rule because principal purpose is factual (sec. 3.01). |
| Missing CP 261 or QSub acceptance notice | The rules do not make a missing notice affect validity. Replacement letters: 800-829-4933, or the Practitioner Priority Service at 866-860-4259 for practitioners (sec. 3.04). |
| Return filed on the wrong form (Form 1120 or 1065 instead of 1120-S) | “nothing in the Code or Income Tax Regulations thereunder provides that such a filing affects the validity of a corporation's S election or QSub election” (sec. 2.03(5)). File correct returns for open years (sec. 3.05). |
For a wrong-form return, the corrective step under section 3.05 is to file returns consistent with S status for open years. This is often where a client first discovers that its Form 1120-S had been rejected or converted; see late S election relief if the issue is really a missing election.
Corrections without a ruling
Missing shareholder consent, permitted year error, missing officer signature. Section 3.03 of Rev. Proc. 2022-19 routes these to existing procedures: the extension for late consents in Treas. Reg. 1.1362-6(b)(3)(iii) (reasonable cause, a request within a reasonable time, and consents from everyone who was a shareholder from the election date to the date the extension is granted), Rev. Proc. 2013-30, or Rev. Proc. 2004-35 for community property states. Only if none of these applies will the national office consider a 1362(f) ruling. Other inadvertent errors on Form 2553 or Form 8869 are corrected by a written explanation mailed to Internal Revenue Service, MS 6055, 333 W. Pershing Rd., Kansas City, MO 64108, or MS 6273, 1973 N. Rulon White Blvd., Ogden, UT 84404, depending on where the S corporation files.
Late QSST or ESBT elections. A trust shareholder that misses its election deadline is an ineligible shareholder, which invalidates or terminates the S election. Rev. Proc. 2013-30, Section 6, provides relief within 3 years and 75 days if the failure was inadvertent and the parties acted diligently. See late QSub, ESBT and QSST elections.
Non-identical governing provisions. Section 3.06 of Rev. Proc. 2022-19 lets a corporation retroactively cure governing provisions (charter, bylaws, state law, binding agreements) that created a second class of stock. Eligibility requires that no disproportionate distribution was made or deemed made to an applicable shareholder, that Forms 1120-S were timely filed (within six months of the original due date, excluding extensions, counts) for each year from adoption of the provision, and that all steps are completed before the IRS discovers the provision. The corporation prepares a Corporate Governing Provision Statement with the representations in section 3.06(2)(c)(ii), and every applicable shareholder signs a Shareholder Statement. The statements are not filed; section 3.06(2)(d) requires the corporation to keep them, with the revised governing provisions, for inspection.
The section 3.06 statements are signed under penalties of perjury and are “subject to verification during IRS examination,” in the words of the required representation. The corporation also represents that it acted reasonably and in good faith in removing the provision once discovered, so the file should show when and how the provision was found.
Requesting a 1362(f) ruling
Under 1.1362-4(c), the request is a letter ruling request that sets out all relevant facts, including the date of the election, a detailed explanation of the event that caused the termination or invalidity, when and how it was discovered, and the steps taken to correct it. Under 1.1362-4(e), the corporation and every person who was a shareholder during the period specified by the IRS must consent to any required adjustments. Each shareholder consent states the shareholder's name, address, TIN, number of shares and the dates the shares were owned; the corporate consent is signed by a person authorized to sign the Form 1120-S.
- Fix the underlying problem first: transfer stock out of the ineligible shareholder, amend the governing provision, or obtain the missing consent. The statute requires steps within a reasonable period after discovery.
- Assemble the facts showing inadvertence: who knew what and when, what diligence the corporation had in place, and why the event was outside its control or not part of a plan.
- Prepare consents from the corporation and all shareholders during the relief period agreeing to adjustments consistent with S treatment.
- Prepare the ruling request under Rev. Proc. 2026-1, section 7, including the penalties of perjury statement and the representations about prior or pending rulings on the same issue.
- Pay the user fee. Rev. Proc. 2026-1, Appendix A, lists $14,500 for rulings under 301.9100-3 and 1362(b)(5); section 1362(f) is not named in that category, so a 1362(f) request falls under “All other letter ruling requests” at $43,700 for 2026, subject to the reduced fees of $3,450 (gross income under $400,000) and $9,775 (gross income $400,000 to under $10 million).
Rev. Proc. 2026-1 generally issues a single ruling for related 1362(f) requests from multiple S corporations qualifying for the substantially identical fee. While a request is pending, the corporation's status “is determined by the Commissioner” under 1.1362-4(f), so returns filed during that time should be prepared knowing the ruling may go either way.
What the campus does
Campus BMF Entity does not decide inadvertence. When it learns of a terminating event, IRM 3.13.2.23.18 has the examiner input TC 096 with the effective date (with blocking series 95 if the final Form 1120-S has not posted), which generates CP 265, Notice of Termination of Status as an S Corporation. A complete termination statement must give the cause, the date of the event and the signature of a person authorized to sign a return.
When a taxpayer writes in to say the election was invalid from the start (the entity was not incorporated on the effective date, not all shareholders signed, or a shareholder was a nonresident alien), IRM 3.13.2.23.14 tells the examiner to verify the claim, reverse the election and send Letter 326C stating the dates for which Form 1120 must be filed. The IRM adds that this “is not a revocation or termination, but an invalid election.” If a ruling later grants relief, IRM 3.13.2.23.12 has Area Counsel forward a copy to the campus Entity function, which prepares a dummy Form 2553 with the ruling attached and inputs the election.
Re-electing after a termination
Under IRC 1362(g), a corporation whose election terminated (and any successor) cannot re-elect for any tax year before its 5th tax year beginning after the first year the termination took effect, unless the IRS consents. IRM 3.13.2.23.13 lists two situations where consent is not needed: the election was revoked effective on the first day of its first intended year, or the corporation failed the small business corporation definition on that first day. Otherwise the campus forwards the re-election request to Chief Counsel, and a user fee applies. A favorable 1362(f) ruling avoids the problem entirely, because the corporation is treated as never having terminated.
Questions practitioners ask
Does a single disproportionate distribution terminate an S election?
Not if the governing provisions give identical distribution and liquidation rights. Rev. Proc. 2022-19, section 3.02, says the IRS will not treat such distributions as creating a second class of stock and will not rule on the question.
Is a revocation covered by 1362(f)?
No. The statute covers invalid elections and terminations under 1362(d)(2) and (3). A revocation can be rescinded before it takes effect under Treas. Reg. 1.1362-6(a)(4), as the Form 1120-S instructions note.
What if a trust shareholder simply missed its QSST election?
Use Rev. Proc. 2013-30, Section 6, if within 3 years and 75 days and the other conditions are met. Beyond that window, the route is a 1362(f) letter ruling.
Do all former shareholders have to consent?
Yes. Treas. Reg. 1.1362-4(e) requires consent from the corporation and every person who was a shareholder at any time during the period the IRS specifies, including people who have since sold their stock.
The client filed Form 1120 for a year when it was an S corporation. Is the election lost?
No. Rev. Proc. 2022-19 says an inconsistent return does not affect the election. Section 3.05 requires filing returns consistent with S status for open years, and the corporation's transactions are treated consistent with S status.