PLR 200133031: Company receives relief for late S corporation and subsidiary elections

Plain-English summary

A company intended to be an S corporation from its first tax year and to treat a wholly owned subsidiary as a qualified subchapter S subsidiary. It missed both election filings and requested relief. The IRS found reasonable cause for the late S corporation election under § 1362(b)(5) and found the requirements for an extension of the subsidiary election satisfied. It gave the company 60 days from the letter date to file Form 2553 and Form 8869 for their intended effective dates. The letter did not decide whether the company or subsidiary otherwise met the relevant eligibility requirements.

Ruling snapshot

• Question: Could the company make its S corporation and subsidiary elections late?
• Outcome: Approved: 60 days to file each election for the stated effective dates.
• Key authorities: IRC §§ 1361, 1362(b)(5); Treas. Reg. §§ 301.9100-1, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200133031
Washington, DC 20224
Release Date: 8/17/2001
Index Number: 1362.01-03
9100.00-00 Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:2 - PLR-104475-01
X = Date:
May 21, 2001

Y =

A =

B =

C =

D1 =

Year 1 =

Dear
:

This letter responds to a letter dated December 26, 2000, and subsequent correspondence , submitted on behalf of X by X’s authorized representative, requesting a ruling under § 1362(b)(5) of the Internal Revenue Code and requesting that X be given an extension of time in which to elect to treat its subsidiary as a qualified subchapter S subsidiary (QSUB).
The information submitted states that A, B, and C are the shareholders of X. A, the CEO of X, represents that it was intended for X to be an S corporation beginning in Year 1, its first taxable year. However, no Form 2553, Election by a Small Business Corporation, was filed on behalf of X for Year 1. Additionally, A intended for X to treat Y, a wholly owned subsidiary of X, as a QSUB effective D1. However, X inadvertently failed to timely file the proper election.

Section 1362(a) 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 1361(a)(1) provides that the term "S corporation" means, with respect to any taxable year, a small business corporation for which an election under § 1362(a) is in effect for such year.

Section 1362(b)(5) provides that if -- (A) an election under

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§ 1362(a) is made for any taxable year after the date prescribed by § 1362(b) for making such election for such taxable year or no such election is made for any taxable year, and (B) the Secretary determines that there was reasonable cause for the failure to timely make such election, the Secretary may treat such an election as timely made for such taxable year.

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.
A taxpayer makes a QSUB election with respect to a subsidiary by filing a Form 8869, Qualified Subchapter S Subsidiary Election, with the appropriate service center. The election may be effective on the date the Form 8869 is filed or up to two months and 15 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 § 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 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

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§ 301.9100-2.

Requests for relief under § 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. Section 301.9100- 3(a).

Based solely on the facts and the representations submitted, we conclude that X has established reasonable cause for failing to make a timely election to be an S corporation for X's first taxable year. Accordingly, provided that X makes an election to be an S corporation by filing a completed Form 2553 with the appropriate service center effective for its first taxable year, within sixty (60) days following the date of this letter, then such election will be treated as timely made for Year 1 . A copy of this letter should be attached to the Form 2553.
In addition, based on the information submitted and the representations made, we conclude that the requirements of § 301.9100-3 have been satisfied. As a result, X is granted an extension of time for 60 days from the date of this letter to file a Form 8869 to elect to treat Y as a QSUB effective D1. A copy of this letter should be attached to the election.

Except as specifically set forth above, no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the Code, including whether X was or is a small business corporation under § 1361(b) of the Code and whether Y was or is a QSUB 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 a 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
Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures: 2
Copy of this letter
Copy for § 6110 purposes