Parent granted more time to make a QSub election

Plain-English summary

The IRS granted an S corporation 120 days to elect to treat a newly acquired domestic subsidiary as a qualified subchapter S subsidiary. The parent had intended to make the QSub election effective the day after acquisition but failed to file the required election, while filing returns consistent with disregarded-entity treatment. The relief is conditioned on the parent receiving and making a requested automatic § 338 election, and the ruling addresses when the subsidiary’s deemed liquidation would occur if that condition is met. The IRS did not rule on the parent’s S corporation eligibility, the subsidiary’s QSub status, or whether a § 338 election is otherwise available.

Ruling snapshot

• Question: Could the parent receive an extension to make the QSub election and coordinate its effective date with a § 338 election?
• Outcome: Approved
• Key authorities: IRC §§ 1361, 1362, 338, and 6110; Treas. Reg. §§ 1.1361-3, 1.1361-4, and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201043003 Third Party Communication: None
Release Date: 10/29/2010 Date of Communication: Not Applicable
Index Number: 1361.05-00, 9100.31-00
Person To Contact:
----------------------------------------------- ------------------------, ID No. ------------------
------------------------------ ----------------------------------------------------
----------------------------------------- Telephone Number:
------------------------------ ---------------------
Refer Reply To:
CC:PSI:B03
PLR-104581-10
Date:
July 27, 2010

                                               Legend

Parent = -----------------------------------------------------------------------------------------------
-----------------------

Subsidiary = -----------------------------------------------------------------------------------------------
-----------------------

State1 = -------------

State2 = ------------

Date1 = -------------------

Date2 = ----------------------

Date3 = ------------------

Date4 = ------------------

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

This responds to the letter dated January 26, 2010, submitted on behalf of Parent by its
authorized representatives, requesting relief under § 301.9100-3 of the Procedure and
Administration Regulations that Parent be granted an extension of time to elect to treat
Subsidiary as a qualified subchapter S subsidiary (QSub) under § 1361(b)(3) of the
Internal Revenue Code (Code).

PLR-104581-10 2

                                       Facts

Parent was incorporated under State1 law on Date1. An election to treat Parent as an
S corporation was made effective on Date2. On Date3, Parent acquired the stock of
Subsidiary, a State2 corporation. Parent intended to elect to treat Subsidiary as a QSub
effective the following day, Date4, and to file a § 338 election, however, Parent failed to
timely file the proper elections. Parent filed returns consistent with Subsidiary being
treated as a disregarded entity. Parent represents that, separate from this ruling
request, it is seeking an automatic extension of time to make a § 338 election.

                                        Law

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 1361(b)(1) provides that the term “small business corporation” means a
domestic corporation which is not an ineligible corporation and which does not (A) have
more than 100 shareholders, (B) have as a shareholder a person (other than an estate,
a trust described in § 1361(c)(2), or an organization described in § 1361(c)(6)) who is
not an individual, (C) have a nonresident alien as a shareholder, and (D) have more
than one class of stock.

Section 1361(b)(3)(A) provides that, except as provided in regulations prescribed by the
Secretary, for purposes of the Code — (i) a corporation which is a QSub shall not be
treated as a separate corporation, and (ii) 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) provides that, for purposes of § 1361(b)(3), the term “qualified
subchapter S subsidiary” means any domestic corporation which is not an ineligible
corporation (as defined in § 1361(b)(2)), if — (i) 100 percent of the stock of such
corporation is held by the S corporation, and (ii) the S corporation elects to treat such
corporation as a QSub.

Section 1.1361-3(a) of the Income Tax Regulations provides the time and manner for
making the 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 1.1361-4(a)(2) provides that if an S corporation makes a valid QSub election
with respect to a subsidiary, the subsidiary is deemed to have liquidated into the S
corporation.

PLR-104581-10 3

Section 1.1361-4(b)(4) provides that an S corporation that makes a qualified stock
purchase of a target may make an election under § 338 with respect to the acquisition if
it meets the requirements for the election, and may make a QSub election with respect
to the target. If an S corporation makes an election under § 338 with respect to a
subsidiary acquired in a qualified stock purchase, a QSub election made with respect to
that subsidiary is not effective before the day after the acquisition date (within the
meaning of § 338(h)(2)). If the QSub election is effective on the day after the
acquisition date, the liquidation under § 1.1361-4(a)(2) occurs immediately after the
deemed asset purchase by the new target corporation under § 338.

Section 301.9100-1(c) provides that the Commissioner may grant a reasonable
extension of time to make a regulatory election, or a statutory election (but no more than
6 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.

Section 301.9100-2 provides the rules governing automatic extensions of time for
making certain elections.

Section 301.9100-3 provides the standards the Commissioner will use to determine
whether to grant an extension of time for regulatory elections that do not meet the
requirements of § 301.9100-2. Under § 301.9100-3, a request for relief will be granted
when the taxpayer provides evidence to establish to the satisfaction of the
Commissioner that (1) the taxpayer acted reasonably and in good faith, and that (2)
granting relief will not prejudice the interests of the Government.

                                   Conclusion

Based solely on the facts submitted and the representations made, we conclude that
the requirements of § 301.9100-3 have been satisfied. Accordingly, Parent is granted
an extension of time of 120 days from the date of this letter to make an election to treat
Subsidiary as a QSub, effective Date4. The election should be made by filing Form
8869 with the appropriate service center, and a copy of this letter should be attached to
the election. A copy is enclosed for that purpose.

Provided that Parent receives the requested automatic extension of time in which to file
a § 338 election with respect to this transaction and makes such election, the deemed
liquidation of Subsidiary into Parent will be treated as occurring immediately after the
deemed purchase of Subsidiary’s assets on Date3 in accordance with § 1.1361-4.

Except as expressly provided herein, we express or imply no opinion concerning the tax
consequences of any aspect of any transaction or item discussed or referenced in this
letter. Specifically, we express or imply no opinion regarding whether Parent is eligible

PLR-104581-10 4

to be an S corporation, whether Parent made a timely and valid election to be an
S corporation, whether Subsidiary is a valid QSub, or whether Parent may make a
§ 338 election with respect to Subsidiary.

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

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the ruling request, it is subject to verification on examination.

In accordance with the power of attorney on file with this office, we are sending a copy
of this letter to Parent's authorized representative.

                                  Sincerely,

                                   /s/

                                  Tara P. Volungis
                                  Acting Chief, Branch 3
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

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