S corporation gets 120 extra days to make a late QSub election for its wholly owned subsidiary

Plain-English summary

An S corporation wholly owns a subsidiary corporation and wanted the subsidiary treated as a "qualified subchapter S subsidiary" (QSub). A QSub election makes the subsidiary invisible for tax purposes: its assets, income, and deductions are treated as the parent S corporation's own, so the group files as a single S corporation rather than two entities. The election is made on Form 8869, but the parent and its shareholders did not know the election was required, so they never filed it, even though they reported their taxes as if the subsidiary were already a QSub. The company asked the IRS for "9100 relief," the discretionary extension available under Treas. Reg. § 301.9100-3 when a regulatory-election deadline is missed but the taxpayer acted reasonably and in good faith. The IRS agreed the requirements were met and granted 120 days from the date of the letter to file the QSub election effective the subsidiary's incorporation date. The IRS expressly did not rule on whether the parent is actually a valid S corporation or whether the subsidiary qualifies as a QSub. Anyone who forgot to file a QSub election would care because this is the standard fix.

Ruling snapshot

• Question: Should the S corporation get more time to make a late QSub election for its subsidiary after being unaware the election was required?
• Outcome: Approved (120-day extension granted to file Form 8869)
• Key authorities: IRC § 1361(b)(3); Treas. Reg. §§ 1.1361-3, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201852011                                              Third Party Communication: None
Release Date: 12/28/2018                                       Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.05-00,
              9100.00-00                                       Person To Contact:
                                                               ------------------------, ID No. ------------------
------------------------------------------------------         ----------------------------------------------------
------------------------------                                 Telephone Number:
-------------------------------                                ----------------------
 ------------------------------                                Refer Reply To:
                                                               CC:PSI:03
                                                               PLR-110324-18
                                                               Date:
                                                               September 18, 2018

Legend

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

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

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

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

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

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

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

This letter responds to a letter dated March 22, 2018, submitted on behalf of X,
requesting an extension of time under § 301.9100-3 of the Procedure and
Administration Regulations for X to elect to treat Sub as a qualified subchapter S
subsidiary ("QSub") under § 1361(b)(3) of the Internal Revenue Code (Code).

                                                     FACTS

The information submitted states that X was formed as a corporation on Date 1 and
elected to be taxed as an S Corporation effective Date 2. Sub incorporated on Date 3.
X wholly owns Sub. X requests permission to file a QSub election for Sub effective
Date 3.

X represents that neither X nor its shareholders were aware of the requirement to make
QSub election to obtain the desired tax treatment for Sub. X further represents that it
reported consistently with the treatment of Sub as a QSub.

                                           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 of
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.

Section 1.1361-3(a)(4) provides that a QSub election cannot be effective more than 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 1.1361-3(a)(6) provides that an extension of time to make a QSub election may
be available under §§ 301.9100-1 and 301.9100-3.

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.

                                      CONCLUSION

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

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal income tax consequences of any aspect of any transaction or item discussed or
referenced in this letter under any other provision of the Code. Specifically, we express
no opinion regarding whether X is a valid S corporation under § 1361, or whether Sub is
eligible to be a QSub under § 1361(b)(3)(B).

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.

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 a power of attorney on file with this office, we are sending a copy of
this letter to your authorized representative.

                                      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