Subsidiary receives more time for corporate and QSub elections

Plain-English summary

An S corporation formed a wholly owned single-member LLC that it intended to classify as a corporation and elect as a qualified subchapter S subsidiary. The parent did not timely file Forms 8832 and 8869 and instead mistakenly filed Form 2553 for the subsidiary, which was ineffective because the parent was an ineligible shareholder for a separate S corporation. The IRS found that the requirements for discretionary election relief were met. It granted 120 days to file both the corporate-classification and QSub elections with the intended effective date.

Ruling snapshot

• Question: May the subsidiary file late corporate-classification and QSub elections with the intended effective date?
• Outcome: Approved, with a 120-day filing period
• Key authorities: IRC § 1361(b)(3); Treas. Reg. §§ 1.1361-3, 301.7701-3, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

                                                          Third Party Communication: None

Number: 201634006 Date of Communication: Not Applicable
Release Date: 8/19/2016
Person To Contact:
------------------------, ID No. -------------------
Index Number: 1361.01-04, 1361.05-00, ----------------------------------------------------
1362.01-00, 9100.00-00 Telephone Number:
---------------------
------------------------------------------------------------- Refer Reply To:
----- CC:PSI:B03
---------------------------------------- PLR-107138-16
Date:

                                                          May 23, 2016

LEGEND

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

Y = ------------------------------------------------------------------------------------

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

Date1 = --------------------------

Date2 = -----------------------------

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

    This responds to a letter dated March 1, 2016, and subsequent correspondence,

submitted on behalf of X by its authorized representative, requesting an extension of
time under § 301.9100-3 to make a late entity classification election to be treated as an
association taxable as a corporation for federal income tax purposes, and to make a
late election to be a qualified subchapter S subsidiary (“QSub”) under §1361(b)(3)(B)(ii)
of the Internal Revenue Code (“Code”) and § 1.1361-3 of the Income Tax Regulations.

  The information submitted states that X is a limited liability company that was

formed under the laws of State on Date1. Since the date of formation of X, Y, a State
corporation, has been the sole owner of X. Prior to the formation of X, Y had elected to
PLR-107138-16 2

be treated as an S corporation within the meaning of § 1361(a) of the Code. Y had
formed X with the intention that X would be operated as a wholly-owned subsidiary of Y.
In addition, Y had intended to elect to treat X as an association taxable as a corporation
for federal tax purposes, and as a QSub effective as of Date1. However, due to
inadvertence, Y failed to timely file Form 8832, Entity Classification Election, and Form
8869, Qualified Subchapter S Subsidiary Election, on behalf of X to be effective Date1.
Instead, on Date2, X erroneously filed a Form 2553 to be treated as an S corporation
effective Date1. X’s S corporation election was ineffective due to the fact that X had an
ineligible shareholder, Y.

   X represents that X and Y have filed tax returns for all of the relevant tax years

consistent with the income tax treatment of X as a qualified subchapter S subsidiary
from Date1.

   Section 1361(b)(3)(A) of the Internal Revenue Code (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, 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 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 to treat an eligible subsidiary as a QSub may be effective up to
two months and 15 days prior to the date the election is filed or not more than 12
months after the election is filed. The proper form for making the election is Form 8869.

   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 301.7701-3(a) provides that a business entity that is not classified as a

corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) (an eligible entity) can
elect its classification for federal tax purposes. Elections are necessary only when an
eligible entity does not want to be classified under the default classification or when an
eligible entity chooses to change its classification.

  Section 301.7701-3(b)(1) provides that, unless the entity elects otherwise, a

domestic eligible entity is (i) a partnership if it has two or more members; or (ii)
disregarded as an entity separate from its owner if it has a single owner.
PLR-107138-16 3

    Section 301.7701-3(c)(1)(i) provides that an eligible entity may elect to be

classified other than as provided under § 301.7701-(3)(b) by filing Form 8832 with the
appropriate service center. Under § 301.7701-3(c)(1)(iii), this election will be effective
on the date specified by the entity on Form 8832 or on the date filed if no such date is
specified. The date specified on Form 8832 cannot be more than 75 days prior to the
date on which the election is filed.

   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.

  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. Under § 301.9100-3, a request 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 that (2) the grant of relief will not
prejudice the interests of the Government.

   Based solely upon the information submitted and the representations made, we

conclude that the requirements of § 301.9100 have been satisfied. Accordingly, X is
granted an extension of time of 120 days from the date of this letter to file Form 8832,
Entity Classification Election, with the appropriate service center to elect to be classified
as an association taxable as a corporation effective Date1. In addition, X is granted an
extension of time of 120 days from the date of this letter to file Form 8869, Qualified
Subchapter S Subsidiary Election, with the appropriate service center to elect to be
treated as a QSub effective Date1. A copy of this letter should be attached to each of
Form 8832 and Form 8869. Copies are enclosed for that purpose.

    Except for the specific rulings above, we express or imply no opinion concerning

the federal income tax consequences of the facts of this case under any other provision
of the Internal Revenue Code. Specifically, we express no opinion regarding whether X
meets the definition of a QSub under § 1361(b)(3)(B).

  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
PLR-107138-16 4

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.

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

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

     In accordance with the power of attorney on file with this office, a copy of this

letter is being sent to X’s authorized representative.

                                    Sincerely,



                                    Bradford R. Poston
                                    Senior Counsel, Branch 3
                                    Office of Associate Chief Counsel
                                    (Passthroughs & Special Industries)

Enclosures (3)
Copies of this letter
Copy for § 6110 purposes

cc: