PLR 200720018: S corporation gets extra time to elect subsidiary status

Plain-English summary

An S corporation acquired a corporation that owned a second subsidiary. It elected qualified subchapter S subsidiary (QSub) status for the first company but missed the election for the second. The IRS granted 60 days from the ruling date to file Form 8869 for the second subsidiary, with the letter attached. The ruling's conclusion specifies the acquisition date as the effective date, although its facts section says the corporation had intended an earlier date. The IRS did not determine whether the parent was a valid S corporation or either subsidiary was a valid QSub.

Ruling snapshot

• Question: May the S corporation file a late QSub election for its second subsidiary?
• Outcome: Approved; Form 8869 must be filed within 60 days, with the ruling attached.
• Key authorities: IRC § 1361(b)(3); Treas. Reg. §§ 1.1361-3(a)(4), 301.9100-1, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200720018
Third Party Communication: None
Release Date: 5/18/2007
Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.05-00,
9100.00-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:PSI:B01
PLR-153060-06
Date: February 12, 2007

Legend

X = ---------------------------------
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Sub1 = -----------------------------
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Sub2 = -------------------------------------------------
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State = ------

D1 = -------------------------

D2 = ----------------------

Dear --------------:

This responds to your letter dated November 13, 2006, submitted on behalf of X, requesting an extension of time under § 301.9100-1(c) of the Procedure and Administration Regulations to elect to treat Sub2 as a qualified subchapter S subsidiary (QSub) for federal tax purposes.

FACTS

According to the information submitted, X was incorporated on D1 under the laws of State. X made an election to be treated as an S corporation effective D1. On D2, X acquired all of the stock of Sub1, which was an S corporation. Sub1 owned all of the
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stock of Sub2, a QSub of Sub1. X filed an election to treat Sub1 as a QSub, and also intended to file an election to treat Sub2 as a QSub effective D1; however, X inadvertently failed to timely file the proper election.

LAW AND ANALYSIS

Section 1362(a) of the Internal Revenue Code provides that a small business corporation may elect to be an S corporation.

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 that 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.

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 1.1361-3(a)(4) of the Income Tax Regulations provides that a QSub election will be effective on the date specified on the election form or on the date the election is filed if no date is specified. The effective date specified on the election form cannot be more than two months and 15 days prior to the date of filing and cannot be more than 12 months after the date of filing.

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

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 solely on the facts submitted and the representations made, we 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 file a Form 8869
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for Sub2 to elect to treat it as a QSub effective D2. A copy of this letter should be attached to the election and is included for that purpose.

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. Specifically, no opinion is expressed concerning whether X is a valid S corporation or whether Sub1 or Sub2 are valid QSubs.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

Sincerely,

William P. O’Shea
Associate Chief Counsel
Passthroughs & Special Industries