PLR 200926028: Subsidiary receives relief for ineffective QSub election

Plain-English summary

An S corporation intended to elect qualified subchapter S subsidiary status for a subsidiary, but the election was ineffective because of procedural defects and because another person still held shares in the subsidiary. After discovering the ownership problem, the parties took corrective action to make the subsidiary eligible and agreed to any adjustments the IRS required. The IRS granted relief under section 1362(f) and treated the subsidiary as a QSub from the intended effective date, provided the election was not otherwise terminated. The parent had to file Form 8869 within 60 days with the ruling attached.

Ruling snapshot

• Question: Could the subsidiary be treated as a QSub from the intended effective date despite procedural defects and an ineligible shareholder?
• Outcome: Approved
• Key authorities: IRC §§ 1361(b)(3)(B)(ii) and 1362(a), (d)(2), (f)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200926028
Third Party Communication: None
Release Date: 6/26/2009
Date of Communication: Not Applicable
Index Number: 1362.04-00, 1361.05-00
Person To Contact:
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Refer Reply To:
CC:PSI:B02
PLR-151241-08
Date:
March 20, 2009

Legend

X = ------------------------------------------------
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Y = ------------------------------------------------
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Z = --------------------------
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State 1 = -------------

State 2 = ---------

Date 1 = -------

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

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

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

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

This responds to letter dated November 24, 2008 submitted on behalf of X, requesting relief under § 1362(f) for an inadvertently ineffective qualified subchapter S subsidiary (QSub) election.

PLR-151241-08
2

The information submitted states that X was incorporated under the laws of State 1 as of Date 1. On Date 2, Y was incorporated under the laws of State 2. Between Date 2 and Date 3, Y filed returns as a corporation for federal tax purposes. X filed a timely election under § 1362(a) to be treated as an S corporation effective beginning on Date 3.

X had intended to elect to treat Y as a QSub effective as of Date 4. However, the QSub election was ineffective due to procedural defects. In addition, the QSub election was also ineffective because Z was a shareholder of Y at the time of election. After having discovered that Z was a shareholder in Y, all parties involved took corrective action to restore Y’s status as an eligible QSub. X, Y and Z have agreed to make any adjustments that the Commissioner may require, consistent with the treatment of Y as a QSub.

Section 1362(f) provides, in part, that if (1) an election under § 1362(a) or § 1361(b)(3)(B)(ii) by any corporation was terminated under § 1362(d)(2), (2) the Secretary determines that the circumstances resulting in such termination were inadvertent, (3) no later than a reasonable period of time after discovery of the circumstances resulting in such termination, steps were taken so that the corporation for which the termination occurred is a small business corporation or a QSub, and (4) the corporation for which the termination occurred, and each person who was a shareholder in such corporation at any time during the period specified pursuant to § 1362(f), agrees to make adjustments (consistent with the treatment of the corporation as an S corporation or a QSub) as may be required by the Secretary with respect to such period, then, notwithstanding the circumstances resulting in such termination, such corporation shall be treated as an S corporation or a QSub during the period specified by the Secretary.

Pursuant to the provisions of § 1362(f), Y will be treated as a QSub from Date 4 and thereafter, provided that its election is not otherwise terminated. Accordingly, Y must, within sixty (60) days from the date of this letter, elect to be treated as a QSub for federal tax purposes effective Date 4. The election should be made by filing Form 8869, Qualified Subchapter S Subsidiary Election, with the appropriate service center. A copy of this letter should be attached to the election.

Except as specifically ruled above, we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the Code. This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

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Pursuant to a power of attorney on file, a copy of this letter is being sent to X.

Sincerely,

Bradford R. Poston
Senior Counsel, Branch 2
(Passthroughs & Special Industries)

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