PLR 200006028: Extra time to elect QSub status for two subsidiaries

Plain-English summary

An S corporation intended to treat two wholly owned subsidiaries as qualified subchapter S subsidiaries, but the required Forms 966 were not filed. The IRS found that the requirements for discretionary filing relief were met. It gave the corporation 60 days from the letter's date to make both elections under Notice 97-4, effective on the date requested in the letter. The IRS did not determine whether the parent qualified as an S corporation or whether either subsidiary otherwise qualified for QSub status.

Ruling snapshot

• Question: Could the corporation make late QSub elections for its two subsidiaries?
• Outcome: Extension granted for 60 days from the letter's date
• Key authorities: IRC § 1361(b)(3)(B); Treas. Reg. §§ 301.9100-1 and 301.9100-3; Notice 97-4

Full text (IRS public release)

INTERNAL REVENUE SERVICE
Index No.: 9100.00-00
November 9, 1999
Number: 200006028
Release Date: 2/11/2000 CC:DOM:P&SI:2 - PLR-112046-99

X =

Y1 =

Y2 =

Date 1 =

Date 2 =

Dear
This responds to a letter dated July 7, 1999, and subsequent correspondence, submitted on X’s behalf, requesting that X be given an extension of time in which to elect to treat each of Y1 and Y2 as a qualified subchapter S subsidiary (QSub) under § 1361(b)(3)(B) of the Internal Revenue Code.

The information submitted states that X incorporated on Date

1. X filed its S corporation election effective for Date 2. X
   has been the sole shareholder of Y1 and Y2 since Date 2. You, in your capacity as president of X, represent that X intended to treat each of Y1 and Y2 as a QSub effective on Date 2. X relied on its tax professionals to make the QSub elections. However, a Form 966, Corporate Dissolution or Liquidation, was not filed for each of Y1 and Y2.
   Section 1361(b)(3)(B) of the Code 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 an 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 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 the making of a QSub election. Under Notice 97-4, a taxpayer makes a QSub election with respect to a subsidiary by filing a Form 966 (Corporate Dissolution or Liquidation), subject to certain modifications, with the appropriate service center. The election may be effective on the date the 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 election is in effect.

                         -2-
   

   Section 301.9100-1(c) of the Procedure and Administration
   Regulations provides that the Commissioner has the discretion to grant a reasonable extension of the time, under the rules set forth in §§ 301.9100-2 and 301.9100-3, to make a regulatory election. Section 301.9100-1(b) defines regulatory election as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.

   Section 301.9100-2 provides the rules governing automatic
   extensions of time for making certain elections.

   Section 301.9100-3 provides the standards the Commissioner
   will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of
   § 301.9100-2. Under § 301.9100-3, a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good faith, and (2) granting relief will not prejudice the interests of the government.

   In the present situation, the requirements of § 301.9100-3
   have been satisfied. As a result, X is granted an extension of time to make elections to treat Y1 and Y2 as QSubs, effective Date 2, until 60 days following the date of this letter. The elections should be made by following the procedure set forth in Notice 97-4. A copy of this letter should be attached.

   Except as specifically ruled upon above, no opinion is
   expressed concerning the federal tax consequences of the facts described above under any other provisions of the Code, including whether X was a small business corporation under § 1361(b) of the Code and whether Y1 or Y2 otherwise qualify as QSubs for federal tax purposes.

   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.

   Pursuant to the power of attorney on file with this office,
   a copy of this letter is being sent to X’s authorized representative.
   Sincerely yours,
   PAUL F. KUGLER
   Assistant Chief Counsel
   (Passthroughs and Special Industries)
   Enclosures: 2
   Copy of this letter
   Copy for § 6110 purposes