Subsidiary receives late QSub and S corporation election relief

Plain-English summary

An S corporation acquired all of a subsidiary's stock but failed to timely file the intended qualified subchapter S subsidiary (QSub) election. A trust later acquired the subsidiary, and the subsidiary did not make an effective S corporation election for the intended date. The taxpayers represented that both failures were inadvertent and were not motivated by tax avoidance or retroactive tax planning. The IRS granted 60 days to file Form 8869 treating the subsidiary as a QSub from the intended date. It also ruled that a Form 2553 filed within 60 days with the intended effective date would be treated as a timely S corporation election.

Ruling snapshot

• Question: May the subsidiary make late QSub and S corporation elections effective on their intended dates?
• Outcome: Approved (60 days granted to file each election)
• Key authorities: IRC §§ 1361(b)(3), 1362(a), 1362(b)(5); Treas. Reg. §§ 1.1361-3(a), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201849006                                              Third Party Communication: None
Release Date: 12/7/2018                                        Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.01-05,
              1361.05-00, 1362.00-00,                          Person To Contact:
              1362.01-00, 1362.01-03,                          ------------------------, ID No. ------------------
              1362.04-00, 9100.00-00,                          ----------------------------------------------------
              9100.31-00                                       Telephone Number:
                                                               ----------------------
--------------------------------                               Refer Reply To:
---------------------------                                    CC:PSI:03
-----------------------------                                  PLR-103888-18
---------------------------                                    Date:
                                                               August 10, 2018




Legend

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

Y                          =         ---------------------------
-------------------------------------------------------------

Trust                      =         ----------------------------------------------------------------
-------------------------------------------------------------

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

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

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

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

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


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

This letter responds to a letter dated January 24, 2018, and subsequent


correspondence, requesting a ruling under § 1362(b)(5) of the Internal Revenue Code
(Code) and § 301.9100-3 of the Procedure and Administration Regulations.

                                          FACTS

According to the information submitted, X and Y were incorporated under the laws of
State. On Date 1, X, an S corporation, acquired all of the stock of Y. X failed to timely
file Form 8869, Qualified Subchapter S Subsidiary (QSub) Election, which was intended
to be effective on Date 2.

On Date 3, Trust acquired all of the stock of Y. On Date 4 Y filed Form 2553, Election
by a Small Business Corporation, to elect S status for what was intended to be an S
election effective on Date 3.

As part of the ruling request the following representations were made. The
circumstances resulting in the ineffectiveness of Y’s QSub and S corporation elections
were inadvertent and were not motivated by tax avoidance or retroactive tax planning.

                                           LAW

Section 1361(b)(3)(A) provides that a QSub shall not be treated as a separate
corporation, and 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) defines a QSub as a domestic corporation, which is not an
ineligible corporation, if 100 percent of the stock of the corporation is held by an S
corporation, and the S corporation elects to treat the corporation as a QSub.

Section 1.1361-3(a) of the Income Tax Regulations provides the time and manner for
making a QSub election. A taxpayer makes a QSub election with respect to a
subsidiary by filing Form 8869, Qualified Subchapter S Subsidiary Election, with the
appropriate service center 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.

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 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.

Section 1362(a) provides that a small business corporation may elect to be an S
corporation.

Section 1362(b) provides the rule on when an S election will be effective. Section
1362(b)(1) provides in relevant part that if an S election is made within the first two and
one-half months of a corporation’s taxable year, then the corporation will be treated as
an S corporation for the year in which the election is made. Under § 1362(b)(3),
however, if an S election is made after the first two and one-half months of a
corporation’s taxable year, then that corporation will not be treated as an S corporation
until the taxable year after the year in which the S election is filed.

Section 1362(b)(5) provides that if: (A) an election under § 1362(a) is made for any
taxable year after the date prescribed by § 1362(b) for making such election for such
taxable year or no such election is made for any taxable year, and (B) the Secretary
determines that there was reasonable cause for the failure to timely make such election,
then the Secretary may treat such an election as timely made for such taxable year.

                                      CONCLUSION

Based solely on the facts submitted and representations made, we conclude the
requirements of §§ 301.9100-1 and 301.9100-3 have been met. Accordingly, an
extension of time of 60 days from the date of this letter to elect to treat Y as a QSub
effective Date 2 is granted. The election should be made by filing Form 8869 with the
appropriate service center. A copy of this letter should be attached to Form 8869.

Based solely on the facts submitted and representations made, we conclude that Y
established reasonable cause for failing to make a timely S corporation election. Thus,
we conclude that Y is eligible for relief under § 1362(b)(5). Accordingly, if Y makes an
election to be an S corporation by filing with the appropriate service center a completed
Form 2553 that contains an effective date of Date 3, within 60 days following the date of
this letter, the election shall be treated as timely made. A copy of this letter should be
attached to Form 2553.



Except as expressly provided herein, we express or imply no opinion concerning the
federal 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
X or Y was or is otherwise eligible to be treated as a QSub or S corporation.

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 as precedent.

Pursuant to a power of attorney on file, we are sending a copy of this letter to the
designated authorized representatives.

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,


                                       ______________________________
                                       Richard T. Probst
                                       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: