New parent could make a QSub election before five-year waiting period ended

Plain-English summary

A subsidiary's qualified subchapter S subsidiary status ended when an ineligible shareholder acquired shares of its former S corporation parent. After later ownership changes, another corporation acquired all of the subsidiary's stock and elected S corporation status. The new parent asked to elect QSub status for the subsidiary before the statutory five-year waiting period expired. The IRS consented to the early election but did not rule on whether the parent otherwise qualified as an S corporation or the subsidiary otherwise qualified as a QSub.

Ruling snapshot

• Question: Could the new S corporation parent elect QSub status for the subsidiary before the five-year post-termination waiting period expired?
• Outcome: approved
• Key authorities: IRC §§ 1361(b)(3) and 1362; Treas. Reg. § 1.1361-5(c)

Full text (IRS public release)

Internal Revenue Service                              Department of the Treasury
                                                      Washington, DC 20224

Number: 201645007                                     Third Party Communication: None
Release Date: 11/4/2016                               Date of Communication: Not Applicable
Index Number: 1362.01-02, 1362.01-03
                                                      Person To Contact:
----------------------------                          -------------------------, ID No. -----------------
-------------------------------------                 -----------------------------------------------------
---------------------------                           Telephone Number:
---------------------------                           ----------------------
                                                      Refer Reply To:
                                                      CC:PSI:B3
                                                      PLR-105580-16
                                                      Date: July 26, 2016



                                           LEGEND

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

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

R          = ---------------------------
             -------------------------

S          = ---------------------------
             -------------------------

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

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

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

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

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


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

This letter responds to a letter dated February 15, 2016, and subsequent
correspondence, submitted on behalf of R by R’s representative, requesting a ruling
under § 1361(b)(3)(D) of the Internal Revenue Code (Code).

PLR-105580-16                                 2


                                          FACTS

According to the information submitted, X was a qualified subchapter S subsidiary
(QSub) of Y, an S corporation, prior to Date 1. On Date 1, a new owner that was an
ineligible S corporation shareholder acquired a significant number of shares of Y.
Consequently, the S election of Y and the QSub election of X terminated on Date 1.

On Date 2, Y sold all of its X stock to a new group of investors so that there was a 100%
ownership change of X.

On Date 3, X shareholders exchanged 100% of their stock for stock in R making R the
owner of all X stock. On Date 4, X acquired the stock of S which merged with X as of
the date of acquisition leaving X as the survivor. R elected S corporation status on Date

5. R is requesting permission to elect QSub status for X on Date 5 prior to the
termination of the five-year waiting period imposed by 1361(b)(3)(D).

                                           LAW

Section 1361(b)(3)(A) 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 the term "qualified subchapter S subsidiary" means
any domestic corporation which is not an ineligible corporation 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 qualified subchapter S subsidiary.

Section 1361(b)(3)(C) provides that if any corporation which was a QSub ceases to
meet the requirements of § 1361(b)(3)(B), such corporation shall be treated as a new
corporation acquiring all of its assets (and assuming all of its liabilities) immediately
before such 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
to be treated as a QSub or (ii) an election to be treated as an S corporation, before its
5th taxable year which begins after the first taxable year for which such termination was
effective, unless the Secretary consents to such election.

Section 1.1361-5(c)(1) provides that, absent the Commissioner’s consent, and except
as provided in § 1.1361-5(c)(2), a corporation whose QSub election has terminated
under § 1.1361-5(a) (or a successor corporation as defined in § 1.1362-5(b)) may not
make an S election under § 1362 or have a QSub election under § 1361(b)(3)(B)(ii)

PLR-105580-16                                 3

made with respect to it for five taxable years (as described in § 1361(b)(3)(D)). The
Commissioner may permit an S election by the corporation or a new QSub election with
respect to the corporation before the five-year period expires. The corporation
requesting consent to make the election has the burden of establishing that, under the
relevant facts and circumstances, the Commissioner should consent to a new election.

                                      CONCLUSION

Based solely on the facts and the representations submitted, we grant permission for R
to make a QSub election for X effective Date 5 prior to the five years after X’s QSub
status terminated Date 1.

Except as specifically set forth above, no opinion is expressed concerning the federal
tax consequences of the facts described above under any other provision of the Code.
In particular, no opinion is expressed or implied regarding X's eligibility to be a QSub or
R’s eligibility to be an S corporation.

A copy of this letter should be attached to R's federal income tax return for its taxable
year for which X’s QSub election is accepted as timely filed. A copy of this letter is being
sent to R for that purpose.

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.

In accordance with a power of attorney on file with this office, we are sending a copy of
this letter to your authorized representative.

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.

                                       Sincerely,



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

Enclosures (2)
      Copy of this letter
      Copy for § 6110 purposes