PLR 200005017: Parent company receives more time for subsidiary election

Plain-English summary

An S corporation intended to treat its wholly owned subsidiary as a qualified subchapter S subsidiary from the subsidiary's incorporation date. It missed the election deadline and filed an election with a later effective date. The IRS found that the requirements for an extension under the election relief regulations were met. It gave the parent 60 days from the letter to file an election effective from the earlier date using the procedure in Notice 97-4. The IRS did not decide whether the parent qualified as an S corporation or the subsidiary qualified as a QSUB.

Ruling snapshot

• Question: Could the parent elect QSUB treatment for its subsidiary from the earlier intended date?
• Outcome: A 60-day extension to make the election was granted
• Key authorities: IRC § 1361(b)(3); Treas. Reg. §§ 301.9100-1 through 301.9100-3; Notice 97-4

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Index Number: 9100.00-00 Washington, DC 20224

Number: 200005017
Person to Contact:
Release Date: 2/4/2000
Telephone Number:

Refer Reply To:
CC:DOM:P&SI:1- PLR-115773-99
Date:
November 5, 1999

Legend:

X =

Y =

State =

D1 =

D2 =

D3 =

This responds to your request dated September 23, 1999 that X be given an extension of time in which to elect to treat its subsidiary as a qualified subchapter S subsidiary (QSUB) under section 1361(b)(3) of the Internal Revenue Code.

FACTS

According to the information submitted, X was incorporated under State law on D1 and elected subchapter S status on D1. Y was incorporated on D2 and is a wholly- owned subsidiary of X. X intended to treat Y as a QSUB effective D2; however, X failed to timely file the proper election. When X discovered its failure to elect QSUB status, it filed a proper election effective D3. X later submitted a private letter ruling request, 2
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asking for late QSUB election relief, effective D2, under sections 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations.

LAW AND ANALYSIS

Section 1361(b)(3)(B) defines the term “qualified subchapter S subsidiary” (QSUB) as a domestic corporation which is not an ineligible corporation, if 100 percent of the stock of the corporation is owned by the S corporation, and the S corporation elects to treat the corporation as a QSUB. The statutory provision does not, however, provide guidance on the manner in which the QSUB election is made or on the effective date of the election.

On January 13, 1997, the Service published Notice 97-4, 1997-1 C.B. 351, providing a temporary procedure for making a QSUB election. Under Notice 97-4, a taxpayer makes a QSUB election with respect to a subsidiary by filing a Form 966, subject to certain modifications, with the appropriate service center. The election may be effective on the date Form 966 is filed or up to 75 days prior to the filing of the form, provided that date is not before the parent’s first taxable year beginning after December 31, 1996, and that the subsidiary otherwise qualifies as a QSUB for the entire period for which the retroactive relief is in effect. If a valid QSUB election is made, the subsidiary is not treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of the QSUB are treated as assets, liabilities, and items of income, deduction, and credit of the parent S corporation.

Under section 301.9100-1(c) of the Procedure and Administration Regulations, the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Code, except subtitles E, G, H, and I, if the taxpayer demonstrates to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting the relief will not prejudice the interests of the government. Section 301.9100-1(b) defines the term “regulatory election” as including an election whose deadline is prescribed by a notice published in the Internal Revenue Bulletin.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make an election. Section 301.9100-1(a).

Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 provides extensions of time for making elections that do not meet the requirements of section 301.9100-2.

Requests for relief under section 301.9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good faith, 3
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and that granting relief will not prejudice the interests of the government. Section 301.9100-3(a).

CONCLUSION

Based solely on the facts submitted and representations made, we conclude that the requirements of section 301.9100-3 have been satisfied. Accordingly X is granted an extension of time of sixty (60) days from the date of this letter to elect to treat Y as a QSUB effective D2. The election should be made by following the procedure set forth in Notice 97-4. A copy of this letter should be attached to the election.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, no opinion is expressed concerning whether X is an S corporation or whether Y is a QSUB for federal tax purposes.

This ruling is directed only to the taxpayer(s) requesting 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, a copy of this letter is being sent to the taxpayer.

Sincerely,

Signed/Paul F. Kugler
PAUL F. KUGLER
Assistant Chief Counsel
(Passthroughs and Special Industries)

Enclosures (2):
Copy of this letter
Copy for section 6110 purposes