Extensions granted for QSub and entity-classification elections

Plain-English summary

An S corporation failed to timely elect qualified subchapter S subsidiary status for a wholly owned entity, and related entity-classification elections also were not timely made. The IRS concluded that the taxpayers satisfied the standards for discretionary relief under Treasury Regulations §§ 301.9100-1 and 301.9100-3. It granted 120 days to file Form 8869 for the QSub election and Forms 8832 for the disregarded-entity and association elections. The ruling did not decide whether the S corporation or subsidiary otherwise met the substantive eligibility rules.

Ruling snapshot

• Request: Extend the time to make a QSub election and two entity-classification elections
• Outcome: Approved; 120 days from the ruling date to file the specified Forms 8869 and 8832
• Key authorities: I.R.C. §§ 1361, 1362; Treas. Reg. §§ 1.1361-3, 301.7701-3, 301.9100-1 through -3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201544022                                              Third Party Communication: None
Release Date: 10/30/2015                                       Date of Communication: Not Applicable
Index Numbers: 1361.05-00, 7701.00-00
               9100.00-00, 9100.31-00                          Person To Contact:
                                                               -----------------------, ID No. -------------------
------------------------------------------------------------   ---------------------------------------------------
-----------------------------------------------------          Telephone Number:
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----------------------------------------------                 Refer Reply To:
 -----------------------------                                 CC:PSI:B3
                                                               PLR-119929-15
                                                               Date:
                                                               July 27, 2015




X                 = -----------------------------------------------------------------------------------------------
                     -------------------
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Y                 = ------------------------------------------
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Z                  = -------------------------------------------------
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A                 = -------------------------
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B                 = -------------------------
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State             = --------------

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

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

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

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

Date 5            = -----------------------

PLR-119929-15                                        2


Date 6          = --------------------------

Date 7          = ------------------------

Date 8          = ----------------------

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

       This letter responds to a letter we received on June 11, 2015, submitted on
behalf of X and Z by their authorized representatives, requesting relief pursuant to
§ 301.9100-3 of the Procedure and Administration Regulations for X to be granted an
extension of time to elect to treat Y as a qualified subchapter S subsidiary (QSub) under
§ 1361(b)(3) of the Internal Revenue Code, for X to be granted an extension of time
under § 301.9100-3 to elect to treat Y as a disregarded entity under § 301.7701-3(c)(1),
and for Z to be granted an extension of time under § 301.9100-3 to elect to treat Y as an
association taxable as a corporation under § 301.7701-3(c)(1)(iv).

                                                  Facts

        The information submitted states that X was incorporated under the laws of State
on Date 1 and elected to be an S corporation effective Date 1. A and B were the sole
shareholders of X. On Date 2, Y was formed as a State limited liability company by A
and B and elected to be an S corporation effective Date 3. On Date 4, A and B
contributed their interests in Y to X. As of Date 4, X owned 100% of Y’s stock. X
represents that it intended to elect to treat Y as a QSub effective Date 5. However, due
to inadvertence, X did not timely file a Form 8869, Qualified Subchapter S Subsidiary
Election, on behalf of Y. On Date 6, Z acquired 100% of the assets of X. X represents
that as of Date 6, Y had an ownership change that would satisfy § 301.7701-3(c)(1)(iv).
It is represented that X and its shareholders have treated X as an S corporation from
Date 1 through Date 7, and the owners of Y have treated Y consistent with the rulings
contained in this letter.

                                             Law and Analysis

        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)(B) provides that the term “small business corporation” means
a domestic corporation that is not an ineligible corporation and that does not, among
other requirements, 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.

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       Section 1361(b)(3)(A) provides that, except as provided in regulations prescribed
by the Secretary, for purposes of this title (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)(B), 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 1362(a)(1) 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 1.1361-3(a) of the Income Tax Regulations prescribes the time and
manner for making an election to be classified as a QSub. Section 1.1361-3(a)(4)
provides that an election to treat an eligible subsidiary as a QSub may be effective up to
two months and 15 days prior to the date the election is filed or not more than 12
months after the election is filed. The proper form for making the election is Form 8869,
Qualified Subchapter S Subsidiary.

        Section 301.7701-3(a) provides, in part, that a business entity that is not
classified as a corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) (an
eligible entity) can elect its classification for federal tax purposes as provided in
§ 301.7701-3. An eligible entity with at least two members can elect to be classified as
either an association (and thus a corporation under § 301.7701-2(b)(2)) or a
partnership, and an eligible entity with a single owner can elect to be classified as an
association or to be disregarded as an entity separate from its owner.

         Section 301.7701-3(b)(1)(i) provides that except as provided in § 301.7701-
3(b)(3), unless the entity elects otherwise, a domestic eligible entity is (A) a partnership
if it has two or more members; or (B) disregarded as an entity separate from its owner if
it has a single owner.

        Section 301.7701-3(c)(1)(i) provides, in part, that an eligible entity may elect to
be classified other than as provided under § 301.7701-3(b), or to change its
classification, by filing Form 8832 with the service center designated on Form 8832.

        Section 301.7701-3(c)(1)(iii) provides that an election made under § 301.7701-
3(c)(1)(i) will be effective on the date specified by the entity on Form 8832 or on the
date filed if no such date is specified on the election form. The effective date specified
on Form 8832 can not be more than 75 days prior to the date on which the election is
filed and can not be more than 12 months after the date on which the election is filed. If

PLR-119929-15                                  4

an election specifies an effective date more than 75 days prior to the date on which the
election is filed, it will be effective 75 days prior to the date it was filed.

        Section 301.7701-3(c)(1)(iv) provides that if an eligible entity makes an election
under § 301.7701-3(c)(1)(i) to changes its classification (other than an election made by
an existing entity to change its classification as of the effective date of this section), the
entity cannot change its classification by election again during the sixty months
succeeding the effective date of the election. However, the Commissioner may permit
the entity to change its classification by election within the sixty months if more than fifty
percent of the ownership interests in the entity as of the effective date of the subsequent
election are owned by persons that did not own any interests in the entity on the filing
date or on the effective date of the entity’s prior election.

        Section 301.9100-1(c) provides that the Commissioner in exercising the
Commissioner’s discretion may grant a reasonable extension of time under the rules set
forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory
election (but not more than 6 months except in the case of a taxpayer who is abroad),
under all subtitles of the Internal Revenue Code (Code), except subtitles E, G, H, and I.

       Section 301.9100-1(b) provides that the term “regulatory election” includes an
election whose due date is prescribed by a regulation published in the Federal Register.

      Section 301.9100-2 provides the standards the Commissioner will use to
determine whether to grant an automatic extension of time for making certain elections.

       Section 301.9100-3 provides the guidelines for granting extensions of time for
making elections that do not meet the requirements of § 301.9100-2. Section 301.9100-
3(a) provides that requests for relief subject to § 301.9100-3 will be granted when the
taxpayer provides the evidence (including affidavits described in § 301.9100-3(e)) to
establish to the satisfaction of the Commissioner that the taxpayer acted reasonably
and in good faith, and the grant of relief will not prejudice the interests of the
Government.

                                         Conclusion

        Based solely upon the information submitted and the representations made, we
conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied.
Accordingly, X is granted an extension of time of one hundred twenty (120) days from
the date of this letter to file Form 8869, Qualified Subchapter S Subsidiary Election, with
the appropriate service center to elect to treat Y as a QSub effective Date 5. A copy of
this letter should be attached to the Form 8869.

       In addition, we grant X and Z an extension of time of one hundred twenty (120)
days from the date of this letter to file Forms 8832, Entity Classification Election, with
the appropriate service center(s) to elect that Y be classified as a disregarded entity

PLR-119929-15                                5

effective Date 7 and as an association taxable as a corporation effective Date 8,
respectively. A copy of this letter should be attached to the Forms 8832.

        Except as specifically ruled above, we express or imply no opinion concerning
the federal tax consequences of the facts described above under any other provision of
the Code, including whether X otherwise qualifies as a small business corporation
under § 1361, or whether Y otherwise meets the definition of a QSub under
§ 1361(b)(3)(B). In addition, § 301.9100-1(a) provides that the granting of an extension
of time for making an election is not a determination that the taxpayer is otherwise
eligible to make the election.

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

      Pursuant to a power of attorney on file, we are sending a copy of this letter to X
and Z’s authorized representatives.

      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 rulings requested, it is subject to verification on
examination.


                                          Sincerely,


                                          Associate Chief Counsel
                                          (Passthroughs and Special Industries)


                                      By: _______________________________
                                         Bradford R. Poston
                                         Senior Counsel, Branch 3
                                         Office of the Associate Chief Counsel
                                         (Passthroughs & Special Industries)

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

cc: