PLR 1306009: IRS preserves QSub status after an inadvertent termination

Plain-English summary

A parent S corporation planned to sell shares of its wholly owned subsidiary, but the sale agreement was terminated before any shares were transferred when the parties discovered that the subsidiary was a qualified subchapter S subsidiary. The subsidiary asked whether its QSub election would be treated as having terminated when the agreement was executed. The IRS concluded that any such termination was inadvertent because the proposed sale did not occur and the parties treated the subsidiary as a QSub. The IRS allowed the subsidiary to continue as a QSub from the relevant date, provided its election was valid and had not otherwise terminated.

Ruling snapshot

• Question: Could the subsidiary continue to be treated as a QSub after a potentially inadvertent termination?
• Outcome: approved
• Key authorities: IRC §§ 1361 and 1362

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201306009 Third Party Communication: None
Release Date: 2/8/2013 Date of Communication: Not Applicable
Person To Contact:
Index Numbers: 1361.05-00, 1362.00-00, ----------------------, ID No. -----------------
Telephone Number:
1362.04-00
--------------------
Refer Reply To:
----------------------------- CC:PSI:B03
------------------------------------- PLR-123126-12
----------------------------------------- Date:
---------------------------------- November 05, 2012

                                                LEGEND

Company = -----------------------------------------------------------------------------------------------------------------

Holdings = -----------------------------------------------------------------------------------------------------------------

State = ---------

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

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

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

Purchasers = -----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
--------------------------------------------------

m = -----

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

   This letter responds to a letter dated May 30, 2012, and subsequent

correspondence, submitted on behalf of Company by Company’s authorized
representative, requesting a ruling under § 1362(f) of the Internal Revenue Code.

                                                 FACTS

PLR-123126-12 2

   Holdings, a State corporation that elected to be an S corporation effective Date 1,

wholly-owned Company, a State corporation, as of Date 2. Holdings elected to treat
Company as a qualified subchapter S subsidiary (QSub) effective Date 2. On Date 3,
Holdings and Purchasers executed a Stock Purchase Agreement in which Purchasers
agreed to purchase m shares of stock in Company from Holdings. Purchasers
transferred funds to Holdings to purchase Company stock. However, before Holdings
transferred any stock to Purchasers, it was discovered that Company was a QSub.
Consequently, Holdings never transferred any of Company’s stock to Purchasers. The
parties terminated the Stock Purchase Agreement and Purchasers’ funds were
refunded.

  Company represents that if its QSub election terminated when Holdings

executed the Stock Purchase Agreement with Purchasers, the termination was
inadvertent and was not motivated by tax avoidance or retroactive tax planning. It is
represented that since Date 2, Holdings has treated Company as a QSub. Company
and Holdings have agreed to make any adjustments consistent with the treatment of
Company as a QSub as may be required by the Secretary.

                             LAW AND ANALYSIS


   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) or (3) or
§ 1361(b)(3)(C), (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, as the case may be, 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 such adjustments (consistent
with the treatment of such corporation as an S corporation or a QSub, as the case may
be) 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, as the case may be during the period
specified by the Secretary.

                                 CONCLUSION

  Based solely on the facts submitted and representations made, we conclude that

if Company’s QSub election terminated on Date 3 when Holdings executed the Stock
PLR-123126-12 3

Purchase Agreement with Purchasers, the termination was inadvertent within the
meaning of § 1362(f). We further hold that, pursuant to the provisions of § 1362(f),
Company will be treated as continuing to be a QSub from Date 3 and thereafter,
provided Company’s QSub election was valid and was not otherwise terminated under
§ 1361(b)(3)(C).

    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 Company
is otherwise eligible to be treated as a QSub or whether Holdings is eligible to be
treated as an S corporation.

  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.

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter to your authorized representative.

   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.

                                  Sincerely,



                                  Mary Beth Carchia
                                  Senior Technician Reviewer, Branch 3
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

Enclosures (2):

  Copy of this letter
  Copy for § 6110 purposes

cc: