Late S corporation and two QSub elections received relief

Plain-English summary

A corporation intended S corporation status from its formation date but did not timely file Form 2553. It also wholly owned two corporations intended to be QSubs from the same date but did not file their elections. The parent, its shareholder, and both subsidiaries had consistently reported the intended S corporation and QSub treatment. The IRS found reasonable cause for the late S election and found the late QSub relief standards satisfied. It treated all three elections as timely if the parent files Form 2553 and both Forms 8869, with the ruling attached, within 120 days.

Ruling snapshot

• Question: Could the corporation make a late S election and late QSub elections for two subsidiaries?
• Outcome: approved, subject to filing all three forms within 120 days
• Key authorities: IRC §§ 1361(b)(3) and 1362(b)(5); Treas. Reg. §§ 1.1361-3(a) and 301.9100-1 through 301.9100-3

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202410003                                             Third Party Communication: None
 Release Date: 3/8/2024                                        Date of Communication: Not Applicable
 Index Numbers: 1361.00-00, 1361.05-00,
               1362.00-00, 1362.01-00,                         Person To Contact:
               1362.01-03, 9100.00-00                          --------------------, ID No. -----------------
                                                               Telephone Number:
 -----------------------------------------------------         --------------------
 ------------------------------------------------              Refer Reply To:
 --------------------------------                              CC:PSI:B03
 -------------------------------                               PLR-112326-23
 ------------------------------                                Date:
                                                               December 11, 2023


 LEGEND:

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

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

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

 A        = --------------------------

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

 Date     = --------------------


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

This letter responds to a letter dated June 8, 2023, and subsequent correspondence,
submitted on behalf of X, by its authorized representative, requesting relief under
§ 1362(b)(5) of the Internal Revenue Code (Code) for X to elect to be an S corporation
and an extension of time under § 301.9100-3 of the Procedure and Administration
Regulations for X to elect to treat Sub 1 and Sub 2 as qualified subchapter S
subsidiaries (QSubs).

PLR-112326-23                                 2

                                          FACTS

The information submitted states that X was incorporated under the laws of State on
Date. A was the sole shareholder of X. X intended to elect to be an S corporation
effective Date but did not file a timely election. X owned 100% of Sub 1 and Sub 2. X
intended to make QSub elections for Sub 1 and Sub 2 effective Date, however the
proper elections were not filed.

X represents that X and its shareholders have treated X as an S corporation, and Sub 1
and Sub 2 as QSubs since Date.

                                           LAW

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 1362(b)(1) provides that an election under § 1362(a) may be made by a small
business corporation for any taxable year (A) at any time during the preceding taxable
year, or (B) at any time during the taxable year and on or before the 15th day of the 3rd
month of the taxable year.

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.

Section 1361(b)(3)(A) generally provides that (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 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 cannot be effective more than two months and 15 days prior to the date the
election is filed or more than 12 months after the election is filed. The proper form for
making the election is Form 8869, Qualified Subchapter S Subsidiary Election.

PLR-112326-23                                 3

Section 1.1361-3(a)(6) provides that an extension of time to make a QSub election may
be available under the 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 to make a regulatory election, or a statutory election (but no 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) defines the term
"regulatory election" as an election whose due date is prescribed by a regulation
published in the Federal Register, or a revenue ruling, revenue procedure, notice, or
announcement published in the Internal Revenue Bulletin.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will
use to determine whether to grant an extension of time to make an election.

Section 301.9100-2 provides the rules governing automatic extensions of time for
making certain elections. Section 301.9100-3 provides the standards the Commissioner
will use to determine whether to grant an extension of time for regulatory elections that
do not meet the requirements of § 301.9100-2.

Section 301.9100-3(a) provides that requests for relief 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 (1) the taxpayer acted reasonably
and in good faith, and (2) 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
established reasonable cause for failing to make a timely election to be an S corporation
with a calendar tax year effective Date, and thus, is eligible for relief under § 1362(b)(5).
Accordingly, provided that X makes an election to be an S corporation by filing a
completed Form 2553, Election by a Small Business Corporation, effective Date, along
with a copy of this letter, with the appropriate service center within 120 days from the
date of this letter, then such election will be treated as timely made for Date.

In addition, we conclude that X has satisfied the requirements of § 301.9100-3 with
respect to the late QSub elections for Sub 1 and Sub 2. As a result, provided that X
makes a QSub election for Sub 1 and Sub 2 by filing completed Forms 8869 effective
Date, respectively, along with a copy of this letter, with the appropriate service center
within 120 days from the date of this letter, then such elections will be treated as timely
made for Date.

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 was otherwise a valid S corporation and whether Sub 1 and

PLR-112326-23                                              4

Sub 2 were otherwise valid QSubs.

This ruling is directed only to the taxpayer who 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 ruling to your authorized representative.

                                                          Sincerely,

                                                           Associate Chief Counsel
                                                           (Passthroughs & Special Industries)


                                                        By:_____________________________
                                                           Richard T. Probst
                                                           Senior Technician Reviewer, Branch 3
                                                           Office of the Associate Chief Counsel
                                                           (Passthroughs & Special Industries)

Enclosure:
    Copy of this letter for § 6110 purposes


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