An S corporation gets 120 days to file the late QSub elections it forgot for two subsidiaries

Plain-English summary

An S corporation owned two lower-tier subsidiaries and intended to treat both as qualified subchapter S subsidiaries (QSubs). A QSub election makes a wholly owned subsidiary invisible for tax purposes, so its income and assets are simply treated as the parent S corporation's. To make the election, the parent must file Form 8869 by a deadline, but here the company never filed the forms. It did, however, file all of its tax returns as if the subsidiaries were QSubs, and it asked the IRS for more time once it noticed the gap. Under the section 301.9100-3 relief rules, the IRS concluded the company acted reasonably and in good faith and that relief would not harm the government. The IRS granted a 120-day extension to file the two late QSub elections effective on the originally intended date.

Ruling snapshot

• Question: Should an S corporation get an extension of time to file late QSub elections (Form 8869) for two subsidiaries?
• Outcome: Approved (120-day extension granted via section 9100 relief)
• 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: 202231011                                              Third Party Communication: None
 Release Date: 8/5/2022                                         Date of Communication: Not Applicable
 Index Number: 1361.05-00, 1361.00-00,
               9100.00-00                                       Person To Contact:
                                                                ----------------------, ID No. -----------------
 --------------------                                           Telephone Number:
 ------------------------------------------------------------   --------------------
 --------------------------------                               Refer Reply To:
 ------------------------------------                           CC:PSI:B01
 ------------------------------------                           PLR-123696-21
 -----------------------------                                  PLR-123697-21
                                                                Date:
                                                                May 09, 2022




Legend

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

 Sub 1      = --------------------------------------------------------------------------------------------------
              -----------------------

 Sub 2      = --------------------------------------------------------------------------------------------------
              -----------------------

 Date       = --------------------------
 1
 Date       = ---------------------
 2
 State      = ------------




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

This letter responds to a letter dated November 1, 2021, submitted on behalf of X by its
authorized representative, requesting an extension of time under § 301.9100-3 of the
Procedure and Administration Regulations to file elections on behalf of Sub 1 and Sub 2
to be qualified subchapter S subsidiaries (“QSubs”) under § 1361(b)(3)(B)(ii) of the
Internal Revenue Code (“Code”) and § 1.1361-3 of the Income Tax Regulations.
PLR-123696-21                                 2

                                           Facts

According to the information submitted and representations within, X was incorporated
under the laws of State on Date 1 and elected to be taxed as an S corporation as of that
date.

X wholly owns Sub 1, which in turn, wholly owns Sub 2. X represents that it intended to
elect to treat Sub 1 and Sub 2 as qualified subchapter S subsidiaries (QSubs) effective
Date 2. However, X failed to timely file Form 8869, Qualified Subchapter S Subsidiary
Election, for Sub 1 and Sub 2. X represents that it has filed its tax returns for all of the
relevant tax years consistent with Sub 1 and Sub 2 being QSubs since Date 2, and that
X has acted in good faith. Finally, X represents that granting relief will not prejudice the
interests of the government.

                                     Law and Analysis

Section 1361(b)(3)(A) of the Internal Revenue Code 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 as defined in § 1361(b)(2), 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. Section 1.1361-3(a)(2) provides that an S corporation makes a
QSub election with respect to a subsidiary by filing a Form 8869 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 of filing.

Section 1.1361-3(a)(6) provides that an extension of time to make a QSub election may
be available under procedures applicable under §§ 301.9100-1 and 301.9100-3.

Section 301.9100-1(c) provides that the Commissioner 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 301.9100-2 provides an automatic extension of time for making certain
elections. Section 301.9100-3 provides extensions of time for making elections that do
not meet the requirements of § 301.9100-2.
PLR-123696-21                                  3

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 the representations made, we conclude that X
has satisfied the requirements of §§ 301.9100-1 and 301.9100-3 with respect to the
QSub elections for Sub 1 and Sub 2. Accordingly, we grant X an extension of time of
120 days from the date of this letter to file a properly executed Form 8869 for each of
Sub 1 and Sub 2 with the appropriate service center effective Date 2. A copy of this
letter should be attached to the elections.

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 as to whether X is
a valid S corporation or whether Sub 1 or Sub 2 is eligible to be a QSub.

The rulings contained in this letter are based upon information and representations
submitted by X and accompanied by a penalty of perjury statement executed by the
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.

This ruling is directed only to the taxpayer who requested it. According to § 6110(k)(3),
this ruling may not be used or cited as precedent.

Pursuant to the power of attorney on file with this office, we are sending a copy of this
letter to X's authorized representative.

                                         Sincerely,

                                         Holly Porter
                                         Associate Chief Counsel
                                         (Passthroughs & Special Industries)


                                by:     __/s/_____________________
                                         Joyce C. Spies
                                         Senior Technician Reviewer, Branch 1
                                         (Passthroughs & Special Industries)
Enclosure (1)
      Copy for §6110 purposes
PLR-123696-21   4

cc: