Late QSub election relief granted after stock acquisition

Plain-English summary

An S corporation acquired all the stock of another corporation and intended to elect qualified subchapter S subsidiary status from the acquisition date. It continued to own all the subsidiary's stock but inadvertently failed to file Form 8869. The parent represented that it acted reasonably and in good faith and that relief would not prejudice the government. The IRS found that the regulatory relief requirements were satisfied and gave the parent 120 days to file the election with retroactive effect. It did not decide whether the parent otherwise qualified as a small business corporation or whether the subsidiary otherwise met the QSub requirements.

Ruling snapshot

• Question: May the S corporation file a late QSub election effective on the date it acquired all the subsidiary's stock?
• Outcome: approved
• Key authorities: IRC §§ 1361(b)(3), 1362(a); Treas. Reg. §§ 1.1361-3, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201740006                                              Third Party Communication: None
Release Date: 10/6/2017                                        Date of Communication: Not Applicable
Index Number: 1361.00-00, 1361.05-00,
              9100.00-00                                       Person To Contact:
                                                               ------------------------------, ID No. ------------
--------------------------------------                         -----------------
-----------------------------------                            Telephone Number:
-------------------------                                      ----------------------
----------------------------                                   Refer Reply To:
                                                               CC:PSI:B01
                                                               PLR-105215-17
                                                               Date:
                                                               June 21, 2017




LEGEND:

X                 =         ----------------------------------------
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Y                 =         -----------------------------------------------------------------------------------------
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Date 1            =        ------------------------

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

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

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

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


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

      This responds to a letter dated February 6, 2017, and additional information,
submitted on behalf of X by its authorized representative, requesting relief pursuant to §
301.9100-3(a) of the Procedure and Administration Regulations for X to be granted an
extension of time to elect to treat Y as a qualified subchapter S subsidiary (QSub) under
§ 1361(b)(3) of the Internal Revenue Code.
PLR-105215-17                                2


Facts

       The information submitted states that X was incorporated under the laws of State
on Date 1 and elected to be treated as an S corporation, effective Date 2. Y was
incorporated under the laws of State on Date 3. X acquired all the stock of Y on Date 4.
X represents that, at all times on and after Date 4, X has owned all of the outstanding
stock of Y and intended to elect to treat Y as a QSub effective Date 4. However, due to
inadvertence, X failed to file Form 8869, Qualified Subchapter S Subsidiary Election.

      X represents that granting relief will not prejudice the interests of the Government
and that it acted reasonably and in good faith.

Law and Analysis

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

      Section 1361(b)(3)(B) defines a qualified subchapter S subsidiary 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 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,
Qualified Subchapter S Subsidiary.

       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
Internal Revenue 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
PLR-105215-17                                3


granted when the taxpayer provides evidence to establish to the satisfaction of the
Commissioner that (1) the taxpayer acted reasonably and in good faith, and that (2)
granting relief will not prejudice the interests of the Government.

Conclusion

        Based solely upon the information submitted and the representations made, we
conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied.
Accordingly, 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 treat Y as a QSub effective Date 4. A copy of this letter should be
attached to the Form 8869. A copy is 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
otherwise qualifies as a small business corporation under § 1361, or whether Y
otherwise meets the definition of a QSub under § 1361(b)(3)(B).

      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.

      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-105215-17                                        4

         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,

                                                  John P. Moriarty
                                                  Acting Associate Chief Counsel
                                                  (Passthroughs & Special Industries)

                                                  Laura C. Fields

                                            By:   ________________________________
                                                  Laura C. Fields
                                                  Senior Technician Reviewer, Branch 1
                                                  Office of the Associate Chief Counsel
                                                  (Passthroughs and Special Industries)
Enclosures (2)
      Copy of this letter
      Copy for § 6110 purposes
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