Ineffective qualified S subsidiary election receives inadvertent relief

Plain-English summary

An S corporation acquired all the stock of another S corporation and attempted to elect qualified S subsidiary status for the acquired company. The election was ineffective because of an inadvertent error. The parent and subsidiary nevertheless filed all relevant returns consistently with treating the subsidiary as a qualified S subsidiary from the intended effective date. The IRS determined that the ineffectiveness was inadvertent under section 1362(f). It treated the subsidiary as a qualified S subsidiary from the intended date forward, provided the election was otherwise valid and had not otherwise terminated.

Ruling snapshot

• Question: Could an inadvertently ineffective qualified S subsidiary election be treated as effective from its intended date?
• Outcome: Approved, the subsidiary is treated as a QSub from the intended effective date
• Key authorities: IRC §§ 1361(b)(3) and 1362(f)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201530002 Third Party Communication: None
Release Date: 7/24/2015 Date of Communication: Not Applicable
Index Number: 1362.04-00
Person To Contact:
--------------------------- --------------------------, ID No. -------------
------------------------------------ Telephone Number:
------------------- ---------------------
-------------------------------- Refer Reply To:
CC:PSI:B03
PLR-101174-15
Date:
February 12, 2015

LEGEND

X = ------------------------------------------------------------------------------------------------------
------------------------

Sub = ------------------------------------------------------------------------------------------------------
------------------------

State = -------------

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

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

D3 = --------------------------

D4 = ---------------------

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

   This letter responds to a letter dated November 19, 2014, and subsequent

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

                                               FACTS

   The information submitted states that Sub was incorporated on D1 under the

laws of State and elected to be an S corporation effective D2. Sub became a wholly
PLR-101174-15 2

owned subsidiary of X on D3, and X elected to treat Sub as a QSub effective as of D4.
However, due to inadvertence, X’s election to treat Sub as a QSub was ineffective. X
represents that it and Sub have filed tax returns for all the relevant tax years consistent
with the tax treatment of Sub as a QSub from D4.

                               LAW AND ANALYSIS

  Section 1362(a) provides that, except as provided in § 1362(g), a small business

corporation may elect, in accordance with the provisions of § 1362, to be an S
corporation.

    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 the term “QSub” 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 1362(d)(2)(A) provides that an election under § 1362(a) will be

terminated whenever (at any time on or after the first day of the first taxable year for
which the corporation is an S corporation) such corporation ceases to be a small
business corporation.

    Section 1362(f) provides that if (1) an election under §§ 1362(a) or

1361(b)(3)(B)(ii) by any corporation (A) was not effective for the taxable year for which
made (determined without regard to § 1362(b)(2)) by reason of a failure to meet the
requirements of § 1361(b) or to obtain shareholder consents or (B) was terminated
under § 1362(d)(2) or (3) or § 1361(b)(3)(C), (2) the Secretary determines that the
circumstances resulting in the ineffectiveness or termination were inadvertent, (3) no
later than a reasonable period of time after discovery of the circumstances resulting in
PLR-101174-15 3

the ineffectiveness or termination, steps were taken (A) so that the corporation is a
small business corporation or a QSub, as the case may be, or (B) to acquire the
shareholder consents, and (4) the corporation and each person who was a shareholder
of the corporation at any time during the period specified pursuant to § 1362(f), agrees
to make such adjustments (consistent with the treatment of the 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 the
ineffectiveness or termination, the corporation will be treated as an S corporation or a
QSub, as the case may be, during the period specified by the Secretary.

                                 CONCLUSION

   Based solely upon the information submitted and the representations made, we

conclude that X’s election to treat Sub as a QSub was ineffective for the taxable year
beginning D4. We also conclude that the circumstances resulting in such
ineffectiveness were inadvertent within the meaning of § 1362(f). Accordingly, under
§ 1362(f), Sub will be treated as a QSub from D4 and thereafter, provided that Sub’s
QSub election was otherwise valid and has not otherwise terminated under
§ 1361(b)(3)(C).

    Except for the specific rulings above, we express or imply no opinion concerning

the federal income tax consequences of the facts of this case under any other provision
of the Internal Revenue Code. Specifically, we express no opinion regarding whether X
otherwise qualifies as a small business corporation under § 1361, or whether Sub
otherwise meets the definition of a QSub under § 1361(b)(3)(B).

  The rulings contained in this letter are 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 request for rulings, it is subject to verification on
examination.

  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.
PLR-101174-15 4

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to X’s authorized representative.

                                   Sincerely,



                                   Bradford R. Poston
                                   Senior Counsel, Branch 3
                                   Office of the Associate Chief Counsel
                                   (Passthroughs and Special Industries)

Enclosures (2):

   Copy of this letter
   Copy for § 6110 purposes

cc: