PLR 9943013: Five-year wait waived for qualified S subsidiary elections

Plain-English summary

An S corporation acquired two corporations that owned five qualified subchapter S subsidiaries. The parent filed elections for the two acquired corporations and sought permission to elect qualified subsidiary treatment for the five lower-tier companies without waiting five years. The IRS waived the waiting period and consented to the five elections, effective on the acquisition date and continuing unless later terminated. The ruling addresses the elections under section 1361(b)(3), which ordinarily imposes a five-year wait after qualified subsidiary status terminates.

Ruling snapshot

• Question: Could the parent elect qualified subsidiary status for five lower-tier corporations despite the five-year waiting rule?
• Outcome: Approved; the IRS waived the waiting period and consented to the elections.
• Key authorities: IRC §§ 1361(b)(3)(B), 1361(b)(3)(D), 1362(a).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Index Number: 1361.05-00 Washington, DC 20224

Person to Contact:

Telephone Number:
Number: 199943013
Release Date: 10/29/1999
Refer Reply To:
CC:DOM:P&SI:1 PLR-111558-99
Date:
July 29, 1999

Legend

X
=

Sub1 =

Sub2 =

Sub3 =

Sub4 =

Sub5 =

Sub6 =

Sub7 =

D1 =

This responds to the letter dated June 25, 1999, submitted on behalf of X,

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CC:DOM:P&SI:1 PLR-111558-99

requesting a waiver of the five-year waiting period imposed by § 1361(b)(3)(D) of the Internal Revenue Code to permit X to make qualified subchapter S subsidiary (QSUB) elections under § 1361(b)(3)(B).

FACTS

X is an S corporation incorporated under State law.

On D1, X acquired all of the outstanding shares of Sub1 and Sub4 stock. Prior to the acquisition, Sub1 wholly-owned Sub2 and Sub3, Sub4 wholly-owned Sub5 and Sub6, and Sub6 wholly-owned Sub7. Subchapter S elections had been filed with respect to Sub1 and Sub4, and QSUB elections had been filed with respect to Sub2, Sub3, Sub5, Sub6, and Sub7.

X has filed QSUB elections for Sub1 and Sub4, and seeks a waiver of the five- year waiting period to make QSUB elections for Sub2, Sub3, Sub5, Sub6, and Sub7.

LAW AND ANALYSIS

Section 1361(b)(3)(A) provides that except as provided in regulations prescribed by the Secretary, for purposes of the Code (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) defines a QSUB as a domestic corporation that is not an ineligible corporation, if 100 percent of the stock of the corporation is owned by the S corporation, and the S corporation elects to treat the corporation as a QSUB.

Section 1361(b)(3)(C) provides that for purposes of the Code, if any corporation which was a QSUB ceases to meet the requirements of § 1361(b)(3)(B), the corporation shall be treated as a new corporation acquiring all of its assets (and assuming all of its liabilities) immediately before the cessation from the S corporation in exchange for its stock.

Section 1361(b)(3)(D) provides that if a corporation's status as a QSUB terminates, such corporation (and any successor corporation) shall not be eligible to make (i) an election under § 1361(b)(3)(ii) to be treated as a QSUB, or (ii) an election under § 1362(a) to be treated as an S corporation, before the 5th taxable year for which the termination was effective, unless the Secretary consents to the election.

In explaining § 1361(b)(3)(D), the Joint Committee on Taxation states as follows:

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It is expected that the Secretary will provide waivers of the five-year rule in appropriate instances. For example, if the stock of the [QSUB] is distributed to the individual shareholders of the subsidiary’s parent, the subsidiary will no longer be a [QSUB] and would be subject to the five-year rule. If the parent corporation retains its subchapter S election and the Secretary determines that the distribution was not made for tax avoidance, it would seem appropriate for the Secretary to waive the five-year rule.

Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in 104th Congress (JCS-12-96), 104th Cong., 2d Sess. 120 (1996).

CONCLUSION

Based solely on the facts submitted and the representations made, the Service waives the five-year waiting period imposed by § 1361(b)(3)(D) and consents to X’s QSUB elections for Sub2, Sub3, Sub5, Sub6, and Sub7 under § 1361(b)(3)(B), effective D1, and thereafter unless otherwise terminated.

Except as specifically set forth above, we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the Code.

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. Pursuant to the power of attorney on file with this office, a copy of this ruling is being sent to your authorized representative.

Sincerely,

Signed/David R. Haglund
David R. Haglund
Senior Technician Reviewer, Branch 1
Office of the Assistance Chief Counsel
(Passthroughs and Special Industries)
Enclosures (2)
Copy of this letter
Copy for §6110 purposes