Successor receives early S corporation and QSub election consent after ESOP acquisition

Plain-English summary

A parent corporation owned all of a subsidiary that had previously elected S corporation status, later became a qualified subchapter S subsidiary, and then lost its QSub status. The parent represented that it was the subsidiary's successor, making both companies subject to five-year waiting periods before new S corporation and QSub elections. The parent's shareholders then sold all of their stock to the company's employee stock ownership plan, which became the sole shareholder. The IRS consented to a new S corporation election for the parent and a new QSub election for the subsidiary before the waiting periods expired. The consent is conditioned on the former shareholders not making a section 1042 election for the ESOP sale. The IRS did not rule on whether the parent and subsidiary otherwise meet the substantive eligibility requirements.

Ruling snapshot

• Question: May a successor corporation make new S corporation and QSub elections before the applicable five-year waiting periods expire?
• Outcome: Approved, conditioned on no section 1042 election for the ESOP stock sale
• Key authorities: IRC §§ 1361(b)(3)(D), 1362(g); Treas. Reg. § 1.1362-5

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202442001 Third Party Communication: None
Release Date: 10/18/2024 Date of Communication: Not Applicable
Index Number: 1361.05-00, 1362.01-02
Person To Contact:
----------------------------------- ------------------------, ID No. -----------------
-------------------------------------- Telephone Number:
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----------------------------- Refer Reply To:
--------------------------------------- CC:PSI:03
PLR-101417-24
Date:
July 22, 2024

LEGEND

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

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

ESOP = --------------------------------------------------------------------------

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

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

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

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

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

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

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

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

PLR-101417-24 2

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

   This letter responds to a letter dated December 18, 2023, and subsequent

correspondence submitted on behalf of X by its authorized representatives, requesting a
ruling under §§ 1362(g) and 1361(b)(3)(D) of the Internal Revenue Code (Code).

                                      FACTS

   The information submitted states that X was incorporated under the laws of State

on Date 5. X holds all the shares of stock in Sub, which was incorporated under the
laws of State on Date 1 and elected to be treated as an S corporation effective Date 2.

    Sub’s S corporation election terminated on Date 3 when it was treated as a

qualified subchapter S subsidiary (QSub). Sub’s QSub election terminated on Date 4.
X represents that it is a successor corporation of Sub within the meaning of § 1.1362-
5(b) of the Income Tax Regulations.

   On Date 6, X’s shareholders sold all their shares of stock in X to ESOP, X’s

employee stock ownership plan. X represents that the shareholders did not make an
election under § 1042 on the sale to ESOP. As a result of the sale, ESOP became the
sole shareholder of X.

    X is requesting permission to elect to be an S corporation effective Date 7, prior

to the termination of the five-year waiting period imposed by § 1362(g). Further, X is
requesting permission to elect to treat Sub as a QSub effective Date 7, prior to the
termination of the five-year waiting period imposed by § 1361(b)(3)(D).

                                   LAW & ANALYSIS

   Section 1362(g) provides that if a small business corporation has made an

election under § 1362(a) and if such election has been terminated under § 1362(d) , the
corporation (and any successor corporation) is not eligible to make an election under §
1362(a) for any taxable year before its fifth taxable year which begins after its first
taxable year for which the termination is effective, unless the Secretary consents to the
election.

    Section 1.1362-5(a) provides that the corporation has the burden of establishing

that under the relevant facts and circumstances, the Commissioner should consent to a
new election. The fact that more than 50 percent of the stock in the corporation is
owned by persons who did not own any stock in the corporation on the date of the
termination tends to establish that consent should be granted. In the absence of this
fact, consent ordinarily is denied unless the corporation shows that the event causing
termination was not reasonably within the control of the corporation or shareholders
having a substantial interest in the corporation and was not part of a plan on the part of
the corporation or of such shareholders to terminate the election.

PLR-101417-24 3

   Section 1.1362-5(b) provides that a corporation is a successor corporation to a

corporation whose election under § 1362 has been terminated if (1) 50 percent or more
of the stock of the corporation (the new corporation) is owned, directly or indirectly, by
the same persons who, on the date of the termination, owned 50 percent or more of the
stock of the corporation whose election terminated (the old corporation); and (2) either
the new corporation acquires a substantial portion of the assets of the old corporation,
or a substantial portion of the assets of the new corporation were assets of the old
corporation.

   Section 1361(b)(3)(D) provides that if a corporation's status as a QSub

terminates, the corporation (and any successor corporation) is not eligible to make (1)
an election to be treated as a QSub, or (2) an election under section § 1362(a) to be
treated as an S corporation, before its 5th taxable year which begins after the 1st
taxable year for which the termination was effective, unless the Secretary consents to
the election.

                                     CONCLUSION

    Based solely on the information submitted and the representations made, X is

granted permission to elect to be an S corporation and to elect to treat Sub as a QSub
effective Date 7. This ruling is conditioned on the shareholders of X not making an
election under § 1042 concerning the sale of their stock to ESOP.

    Except as specifically ruled upon above, we express or imply no opinion

concerning the federal tax consequences of any facts discussed or referenced in this
letter. Specifically, we express or imply no opinion regarding X’s eligibility to be an S
corporation or Sub’s eligibility to be a QSub.

   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 requested ruling, it is subject to verification on examination.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.

PLR-101417-24 4

  In accordance with a power of attorney on file with this office, we are sending a

copy of this letter to your authorized representatives.

                                               Sincerely,




                                               Robert D. Alinsky
                                               Branch Chief, Branch 3
                                               Office of the Associate Chief Counsel
                                               (Passthroughs & Special Industries)

Enclosure
Copy of this letter for § 6110(k)(3) purposes

cc: ---------------------------

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