Parent and subsidiaries receive coordinated late S corporation and QSub election relief

Plain-English summary

A multi-owner limited liability company acquired one S corporation and later received all shares of another, unintentionally terminating or preventing the subsidiaries' S treatment because the parent was not an eligible S corporation shareholder. The owners had intended all three entities to remain passthroughs and filed returns consistently with that intent. The IRS granted the parent 120 days to file Form 8832 for corporate classification and Form 2553 for S corporation status, both effective as of the first acquisition date. It treated the subsidiaries' otherwise ineffective QSub elections as inadvertent and granted 120 days to file Forms 8869 for their respective effective dates. All relief was conditioned on filing amended returns for the specified years consistently with the parent as an S corporation and the subsidiaries as QSubs.

Ruling snapshot

• Question: May the parent make late corporate and S elections and obtain inadvertent-election and late-filing relief for two QSub subsidiaries?
• Outcome: Approved with conditions. The required Forms 8832, 2553, and 8869 must be filed within 120 days, along with consistent amended returns.
• Key authorities: IRC §§ 1361(b)(3), 1362(a), 1362(b)(5), 1362(f); Treas. Reg. §§ 1.1361-3, 301.7701-3, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201721008 Third Party Communication: None
Release Date: 5/26/2017 Date of Communication: Not Applicable
Index Number: 1362.00-00, 1362.04-00
Person To Contact:
------------------------------ ------------------------, ID No. ------------------
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------------------------ Telephone Number:
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Refer Reply To:
CC:PSI:B03
PLR-131476-16
Date:
February 22, 2017

LEGEND

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

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

Z = --------------------------------------------

State = ---------

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

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

Date3 = ------------------------

Date4 = ---------------------------

Date5 = ----------------

Year1 = -------

Year2 = -------

Dear ---------------------:
PLR-131476-16 2

    This responds to a letter dated October 5, 2016, and subsequent

correspondence submitted on behalf of X by X’s authorized representative, requesting
an extension of time under § 301.9100-3 of the Procedure and Administration
Regulations to make a late entity classification election to be treated as an association
taxable as a corporation, relief to make a late S corporation election under § 1362(b)(5)
of the Internal Revenue Code (the Code), and an extension of time under 301.9100-3 to
make elections to treat Y and Z as qualified subchapter S subsidiaries (QSubs) under
§ 1361(b)(3)(B)(ii) of the Code and 1.1361-3 of the Income Tax Regulations. As part of
this request, X also requests relief for ineffective QSub elections under § 1362(f) on
behalf of Y and Z due to the fact that X was an ineligible shareholder at the time X had
acquired the shares of Y and Z (and, as a result, the QSub elections on behalf of Y and
Z would have been ineffective even if they had been timely made).

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

Date1 as a limited liability company. At the time of its formation, more than one
individuals owned interests in X. On Date2, X purchased all of the issued and
outstanding shares of Y. Y was a corporation that had been formed under the laws of
State on Date3 that had previously elected to be an S corporation. On Date4, all of the
issued and outstanding shares of Z were contributed to X. Z was a corporation that had
been formed under the laws of State on Date5 that had previously elected to be an S
corporation. X represents that its owners always intended to treat X, Y and Z as
passthrough entities but were unaware and were not advised that X’s acquisition of the
shares of Y and Z would cause the S corporation elections of Y and Z to terminate.

   X represents that X and all of X’s shareholders have filed tax returns consistent

with X being a passthrough entity since Date1, and filed returns for Y and Z as if they
were S corporations since Date2 and Date4, respectively. X and its shareholders have
agreed to make such adjustments consistent with the treatment of X as an S
corporation, and Y and Z as QSubs, as may be required by the Secretary.

  RULINGS REQUESTED

  1. X requests an extension of time under § 301.9100-3 of the Procedure and
     Administration Regulations for X to make a late entity classification election to
     be treated as an association taxable as a corporation effective Date2;
  2. X requests relief for X to make a late S corporation election under §1362(b)(5)
     of the Internal Revenue Code (the Code) effective Date2;
  3. X requests inadvertent ineffective election relief under § 1362(f) on behalf of
     Y and Z to be treated as QSubs under § 1361(b)(3)(B)(ii) of the Code and
     § 1.1361-3 of the Income Tax Regulations effective Date2 and Date4,
     respectively; and
  4. X requests an extension of time under 301.9100-3 to make late elections to
     treat Y and Z as QSubs effective Date2 and Date4, respectively.

PLR-131476-16 3

   RULING 1

    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 its 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.

    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) provides that the term
“regulatory election” includes an election whose due date is prescribed by a regulation
published in the Federal Register.

   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 the
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.

    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 (2) the grant of relief will not prejudice the interests of the Government.

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

conclude that X has satisfied the requirements of §§ 301.9100-1 and 301.9100-3. As a
result, X is granted an extension of time of 120 days from the date of this letter to file a
Form 8832 with the appropriate service center and elect to be treated as an association
taxable as a corporation for federal tax purposes, effective Date2. A copy of this letter
should be attached to the Form 8832.
PLR-131476-16 4

   RULING 2

  Section 1362(a) provides that a small business corporation may elect to be an S

corporation.

   Section 1362(b) provides the rule on when an S election will be effective.

Section 1362(b)(1) provides in relevant part that if an S election is made within the first
two and one-half months of a corporation’s taxable year, then the corporation will be
treated as an S corporation for the year in which the election is made. Under
§ 1362(b)(3), however, if an S election is made after the first two and one-half months of
a corporation’s taxable year, then that corporation will not be treated as an S
corporation until the taxable year after the year in which the S election is filed.

   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.

    Based solely on the facts submitted and the representations made, we conclude

that X has established reasonable cause for failing to make a timely election to be an S
corporation effective Date2. Accordingly, provided that X makes an election to be an S
corporation by filing a completed Form 2553 effective Date2, 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 Date2.

   RULING 3

  Section 1361(b)(3)(B) provides that the term “qualified subchapter S subsidiary”

means any domestic corporation which is not an ineligible corporation (as defined in
§ 1362(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 qualified
subchapter S subsidiary.

  Section 1.1361-3(a)(1) provides that the corporation for which the QSub election

is made must meet all the requirements of § 1361(b)(3)(B) at the time the election is
made and for all periods for which the election is to be effective.

    Section 1.1361-3(a)(2) provides that, except as provided in § 1361(b)(3)(D) and

§ 1.1361-5(c) (five-year prohibition on reelection), an S corporation may elect to treat an
eligible subsidiary as a QSub by filing the completed Form 8869, Qualified Subchapter
S Subsidiary Election.
PLR-131476-16 5

  Section 1.1361-3(a)(3) provides that a QSub election may be made by the S

corporation parent at any time during the taxable year.

     Section 1.1361-3(a)(4) provides that a QSub election will be effective on the date

specified on the election form or on the date the election form is filed if no date is
specified. The effective date specified on the form cannot be more than two months
and 15 days prior to the date of filing and cannot be more than 12 months after the date
of filing. For this purpose, the definition of the term month found in § 1.1362-
6(a)(2)(ii)(C) applies. If an election specifies an effective date more than two months
and 15 days prior to the date on which the election form is filed, it will be effective two
months and 15 days prior to the date it is filed. If an election form specifies an effective
date more than 12 months after the date on which the election is filed, it will be effective
12 months after the date it is filed.

    Section 1362(f) provides that if (1) an election under § 1362(a) or

§ 1361(b)(3)(B)(ii) by a corporation (A) was not effective for the taxable year for which
made (determined without regard to § 1362(b)(2)) by reason of a failure to meet the
requirements of § 1361(b) or to obtain shareholder consents or (B) was terminated
under § 1362(d)(2) or (3), (2) the Secretary determines that the circumstances resulting
in the ineffectiveness or termination were inadvertent, (3) no later than a reasonable
period of time after discovery of the circumstances resulting in the ineffectiveness or
termination, steps were taken (A) so that the corporation is a small business corporation
or (B) to acquire the shareholder consents, and (4) the corporation and each person
who was a shareholder of the corporation at any time during the period specified
pursuant to § 1362(f), agrees to make such adjustments (consistent with the treatment
of the corporation as an S corporation or a qualified subchapter S subsidiary, as the
case may be) as may be required by the Secretary with respect to such period, then,
notwithstanding the circumstances resulting in the ineffectiveness or termination, such
corporation will be treated as an S corporation or a qualified subchapter S subsidiary, as
the case may be during the period specified by the Secretary.

   Based solely on the facts submitted and the representations made, we conclude

that any QSub elections filed on behalf of Y and Z with an effective date of Date2 and
Date4, respectively, would have been ineffective if they had been timely filed because
X, on those dates, had not properly or timely elected to be an S corporation effective on
those dates. We further conclude that any QSub elections timely filed on behalf of Y
and Z with an effective date of Date2 and Date4, respectively, would have been
inadvertently ineffective within the meaning of § 1362(f). We further hold that, pursuant
to the provisions of § 1362(f), Y and Z will be treated as making effective QSub
elections with an effective date of Date2 and Date4, respectively, provided that a late S
corporation election is filed for X as provided for above, and late QSub elections for Y
and Z are filed as provided for below.

   RULING 4

PLR-131476-16 6

   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 301.9100-1(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) provides that the term
“regulatory election” includes an election whose due date is prescribed by a regulation
published in the Federal Register.

   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 the
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.

    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 (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. X is granted an
extension of time of 120 days from the date of this letter to file Forms 8869, Qualified
Subchapter S Subsidiary Election, with the appropriate service center to elect to treat Y
as a QSub effective Date2 and to elect to treat Z as a QSub effective Date4. A copy of
this letter should be attached to each Form 8869.
PLR-131476-16 7

   All of the rulings contained above are contingent upon X filing amended federal

tax returns for Year1 through Year2 consistent with the treatment of X as an S
corporation, and Y and Z as QSubs for all applicable tax years. If this condition is not
met, then this letter ruling is null and void.

    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. Specifically, no opinion is expressed regarding X’s eligibility to be an S
corporation. Further, no opinion is expressed as to whether Y and Z are eligible to elect
to be treated as QSubs or were previously eligible to be S corporations.

   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 rulings contained in this letter are 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 request for rulings, it is subject to verification on
examination.

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

copies of this letter to X’s authorized representatives.

                                  Sincerely,



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

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

cc: