PLR 200537003: Parent receives late S and subsidiary election relief

Plain-English summary

A corporation intended to become an S corporation when it first had shareholders but missed the election filing deadline. It later filed an election for its wholly owned subsidiary to be a qualified subchapter S subsidiary, which the IRS rejected because the parent lacked S status. The IRS found reasonable cause for the late parent election and granted an extension for the subsidiary election. It gave the parent 60 days to file Form 2553 and Form 8869, each with a copy of the ruling, for their requested effective dates. The IRS did not decide whether the parent or subsidiary otherwise met their respective eligibility requirements.

Ruling snapshot

• Question: Could the parent make a late S election and revive the subsidiary's QSub election?
• Outcome: Approved for both elections, provided the forms were filed within 60 days.
• Key authorities: IRC §§ 1361(b)(3), 1362(b)(5); Treas. Reg. § 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200537003
Release Date: 9/16/2005
Index Number: 1362.01-03, 1361.05-00

Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:PSI:2 – PLR-104671-05
Date:
May 24, 2005

LEGEND:

X = --------------------------------------------------------------------
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Y = -------------------------------------
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State A = ----------

State B = --------

Date 1 = --------------------------

Date 2 = -------------------------

Date 3 = -----------------------

Date 4 = -----------------------

Dear ---------------

This letter responds to a letter dated January 6, 2005, together with subsequent correspondence, submitted on behalf of X, requesting relief under § 1362(b)(5) of the Internal Revenue Code for X to be an S corporation and requesting an extension of time under § 301.9100-3 of the Procedure and Administration Regulations for X to elect to treat Y as a qualified subchapter S subsidiary (QSub).

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The information submitted states that X was incorporated under the laws of State A on Date 1 and first had shareholders on Date 2. X’s president and sole shareholder represents that X intended to elect to be an S corporation effective Date 2. However, the Form 2553, Election by a Small Business Corporation, was not timely filed.

On Date 3, Y was incorporated under the laws of State B and issued all of its outstanding stock to X on Date 4. X timely submitted a Form 8869, Qualified Subchapter S Subsidiary Election, to treat Y as a QSub, effective Date 4. However, the form was rejected because X was not an S corporation.

Section 1362(a) provides that a small business corporation can elect to be treated as an S corporation.

Section 1362(b) provides when an S election becomes effective. If an S election is made within the first two and one-half months of a corporation's taxable year, then that corporation will be treated as an S corporation for the year in which the election was made. If an election is made after the first two and one-half months of a corporation's taxable year, then the corporation will generally not be treated as an S corporation until the following taxable year.

Section 1362(b)(5) provides that if no election is made pursuant to § 1362(a), or if the election is made after the date prescribed for making such an election, and the Secretary determines reasonable cause existed for the failure to timely make the election, then the Secretary can treat such an election as timely made for that taxable year and effective as of the first day of that taxable year.

Section 1361(b)(3)(A) provides that a QSub shall not be treated as a separate corporation, and all assets, liabilities, and items of income, deduction, and credit of a QSub shall be treated as assets, liabilities, and such items (as the case may be) of the S corporation.

Section 1361(b)(3)(B) defines a QSub as a domestic corporation, which is not an ineligible corporation, in which 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.

Section 1.1361-3(a) of the Income Tax Regulations provides the time and manner of making a QSub 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.

Section 301.9100-1(c) gives the Commissioner discretion to grant reasonable extensions of time to make regulatory elections under the rules of §§ 301.9100-2 and 301.9100-3. Under § 301.9100-1(b), a regulatory election includes an election whose due date is prescribed by a regulation published in the Federal Register.

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Section 301.9100-3 sets forth the standards that the Commissioner uses to determine whether to grant a discretionary extension of time. These standards indicate that the Commissioner should grant relief when the taxpayer provides evidence proving to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the Government.

Based solely on the information submitted and the representations made, we conclude that X has established reasonable cause for failing to make a timely election to be an S corporation. Accordingly, provided that X makes an election to be an S corporation by filing a completed Form 2553 effective Date 2, along with a copy of this letter, with the appropriate service center within 60 days from the date of this letter, then such election will be treated as timely made for Date 2.

We also conclude that X has satisfied the requirements of §§ 301.9100-1 and 301.9100-3. As a result, X is granted an extension of time of 60 days from the date of this letter to elect to treat Y as a QSub effective Date 4. Accordingly, provided that X makes the above-mentioned S election and makes a QSub election for Y by filing a completed Form 8869 effective Date 4, along with a copy of this letter, with the appropriate service center within 60 days from the date of this letter, then such election will be treated as timely made for Date 4.

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. In particular, no opinion is expressed concerning whether X is or was a small business corporation or whether Y is or was eligible to be a QSub.

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

Heather C. Maloy
Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures (2)

Copy of this letter
Copy for section 6110 purposes