PLR 200008016: Parent receives 60 days to file three late QSub elections

Plain-English summary

A holding company acquired an S corporation that owned two subsidiaries with qualified subchapter S subsidiary elections. Oversight and a misunderstanding caused the holding company to miss the deadline to elect QSub treatment for all three corporations from the acquisition date. The IRS found the requirements for regulatory extension relief satisfied and gave the parent 60 days from the letter to make the three elections effective on the redacted acquisition date. It directed the parent to follow Notice 97-4 and attach the ruling to the election. The IRS did not decide whether the parent was a valid S corporation or whether the subsidiaries otherwise qualified as QSubs.

Ruling snapshot

• Question: Could the holding company file late QSub elections for the acquired corporation and its two subsidiaries?
• Outcome: Approved, with 60 days to elect QSub status effective on the acquisition date
• Key authorities: IRC § 1361(b)(3)(B); Treas. Reg. § 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
1361.05-00
Number: 200008016
Person to Contact:
Release Date: 2/25/2000
Telephone Number:

Refer Reply To:
CC:DOM:P&SI:1-PLR-116278-99
Date:
Nov 18, 1999

Legend

X =

W =

Y =

Z =

This letter responds to your letter dated October 5, 1999 written on behalf of X, requesting a ruling that X be granted an extension of time in which to elect to treat its subsidiary W and W’s subsidiaries Y and Z as qualified subchapter S subsidiaries (QSub).

FACTS

X is a holding company. On Date 1 X acquired all of the outstanding stock of W.
Prior to X’s acquisition of W, W was an S corporation as defined in section 1361(a)(1). When X acquired W, W owned all of the outstanding stock of Y and Z and had valid QSub elections in effect for both. Due to an oversight by the individual responsible for 2
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X’s tax filings and a subsequent misunderstanding by X’s accountant, X did not timely file QSub elections for W, Y and Z.

LAW AND ANALYSIS

Section 1361(b)(3)(B) defines the term “qualified subchapter S subsidiary” as a domestic corporation which is not an ineligible corporation as defined in section 1361(b)(2), if (1) an S corporation holds 100 percent of the stock of the corporation, and (2) that S corporation elects to treat the subsidiary as a QSub. The statutory provision, however, does not 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 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 the Form 966 is filed or up to 75 days prior to the filing of the form, provided that the 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 to be effective.

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 301.9100-2 and 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make an election. Section 310.9100-2 provides automatic extensions of time for making certain elections, but does not apply to QSub 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, and that granting relief will not prejudice the interests of the government.

CONCLUSIONS

In the present situation, the requirements of sections 301.9100-1 and 301.9100- 3 have been satisfied. As a result, X is granted an extension of time of sixty (60) days 3
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from the date of this letter to make an election to treat W, Y, and Z as QSubs effective Date 1. The taxpayer should make the election by following the procedure set forth in Notice 97-4 and attaching a copy of this letter to the election. A copy is enclosed for that purpose.

Except as specifically set forth above, no opinion is expressed or implied concerning the federal tax consequences of the facts described above under any other provision of the Code. Specifically, no opinion is expressed concerning whether X is a valid S corporation or whether its subsidiaries W, Y, and Z are valid QSubs for federal tax purposes.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) 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 the taxpayer.

Sincerely yours,

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