PLR 200218025: Company receives extra time to make a QSub election

Plain-English summary

An S corporation bought all the stock of another S corporation and intended to treat the subsidiary as a qualified subchapter S subsidiary. The parent did not make the required QSub election on time because its acquisition counsel did not advise it that an election was needed. The IRS concluded that the requirements for relief under the procedural regulations were satisfied and granted 60 days to make the election effective as of the acquisition date. The company had to attach the ruling to Form 8869, and the IRS did not decide whether either company otherwise qualified for the claimed status.

Ruling snapshot

• Question: May the S corporation make a late election to treat its wholly owned subsidiary as a QSub?
• Outcome: Approved, with 60 days to file Form 8869 for the specified effective date.
• Key authorities: IRC § 1361(b)(3); Treas. Reg. §§ 301.9100-1 through 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200218025
Washington, DC 20224
Release Date: 5/3/2002
Index Numbers: 1362.01-03; 9100.00-00 Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:3 PLR-153719-01
Date:
January 31, 2002

Legend

Company
=

Subsidiary =

State
=

a
=

b
=

c
=

This letter responds to a letter dated August 31, 2001, and subsequent correspondence, requesting on behalf of Company an extension of time pursuant to §§ 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations for Company to elect to treat Subsidiary as a qualified subchapter S subsidiary under § 1361(b)(3) of the Internal Revenue Code.

FACTS

According to the information submitted, Company was incorporated on a under the laws of State. Company is an S corporation. On b, Company purchased all of the outstanding stock of Subsidiary, also an S corporation. Thus, Subsidiary became a wholly owned subsidiary of Company. Company represents that it intended to treat Subsidiary as a qualified subchapter S subsidiary (“QSub”). However, Company failed to file timely the proper election for Subsidiary to be a QSub.

Company represents that it failed to make the election because, after exercising reasonable diligence by retaining legal counsel, it was not aware that a QSub election was required. Company and Subsidiary each retained the services of an attorney for the acquisition. However, the attorneys serving as legal counsel for the acquisition did not advise Company of the required QSub election. Company also represents that it was unaware of the required QSub election until c, when informed by its accountant who was preparing tax returns for the year of the acquisition. Finally, Company represents that hindsight is not involved in its request for relief.

LAW & ANALYSIS

Section 1361(b)(3)(B) defines the term "qualified subchapter S subsidiary" as a domestic corporation that is not an ineligible corporation, if 100 percent of the stock of the corporation is held 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.

A taxpayer makes a QSub election for a subsidiary by filing 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.

Section 1.1361-3(a)(6) of the Income Tax Regulations provides that an extension of time to make a QSub election may be available under §§ 301.9100-1 and 301.9100-3.

Under § 301.9100-1(c), 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. Section 301.9100-1(b) defines the term "regulatory election" as including an election whose due date is prescribed by a regulation published in the Federal Register.

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 a regulatory 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 § 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).

CONCLUSION
 Based on the facts submitted and representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Consequently, Company is granted an extension of time of 60 days from the date of this letter to make an election to treat Subsidiary as a QSub effective b. A copy of this letter should be attached to the Form 8869 filed with the Service Center. A copy is enclosed for that purpose.

Except as specifically set forth above, we express or imply no opinion concerning the federal tax consequences of the facts described above under any other provision of the Code. Specifically, we express or imply no opinion concerning whether Company is a valid S corporation or whether Subsidiary is a valid QSub for federal tax purposes.

Pursuant to a power of attorney on file with this office, a copy of this letter is being sent to Company’s authorized representative.

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.

Sincerely Yours,
Paul F. Kugler
Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes

cc: