Five subsidiary elections receive inadvertent or late-filing relief

Plain-English summary

An S corporation intended five wholly owned subsidiaries to be qualified subchapter S subsidiaries, or QSubs. Elections filed for four subsidiaries were ineffective, and the parent inadvertently failed to file Form 8869 for the fifth. The parent and its shareholders had consistently filed returns treating the parent as an S corporation and all five subsidiaries as QSubs. The IRS treated the four ineffective elections as inadvertent under section 1362(f), subject to each subsidiary otherwise qualifying. It also gave the parent 120 days to file Form 8869 for the fifth subsidiary and have that election treated as timely from the requested effective date.

Ruling snapshot

• Question: Could the parent preserve four ineffective QSub elections and make a late election for a fifth subsidiary?
• Outcome: approved
• Key authorities: IRC §§ 1361(b)(3), 1362(f); 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: 201750001                                            Third Party Communication: None
Release Date: 12/15/2017                                     Date of Communication: Not Applicable
Index Number: 1362.04-00, 9100.00-00,
              1361.05-00                                     Person To Contact:
                                                             -----------------------, ID No. --------------
------------------------------------------                   Telephone Number:
---------------------------------------------------------    ----------------------
-----------------------                                      Refer Reply To:
--------------------------------------------                 CC:PSI:B01
                                                             PLR-105938-17
                                                             PLR-105942-17
                                                             Date:
                                                             August 21, 2017


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

Sub 1        = ---------------------------------------------------------------------------------------------------
               ------------------------

Sub 2        = ---------------------------------------------------------------------------------------------------
               -----------------------

Sub 3        = ---------------------------------------------------------------------------------------------------
               -----------------------

Sub 4        = ---------------------------------------------------------------------------------------------------
               -----------------------

Sub 5        = ---------------------------------------------------------------------------------------------------
               ------------------------

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

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

Date 2       = ----------------------
               ---------------------------------------------------------------------------------------------------
Date 3       = ----------------------

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

PLR-105938-17                                 2


Dear ----------------

This letter responds to a letter dated February 13, 2017, submitted on behalf of X,
requesting relief under § 1362(f) of the Internal Revenue Code and an extension of time
under § 301.9100-3 of the Procedure and Administration Regulations for X to elect to
treat Sub 3 as a qualified subchapter S subsidiary (QSub).

Facts

The information submitted states that X was incorporated in State on Date 1 and
elected to be treated as an S corporation effective Date 2.

X acquired 100 percent of the stock of Sub 1 and Sub 2 on Date 3. As of Date 3, Sub 1
owned 100 percent of the stock of Sub 3 and Sub 4. X timely elected to treat Sub 1,
Sub 2, and Sub 4 as QSubs; however, due to inadvertence, these elections were
ineffective. Additionally, Sub 5 was incorporated on Date 4 and at all times has been
100 percent owned by Sub 1. X also timely elected to treat Sub 5 as a QSub, effective
Date 4; however, this election was also ineffective.

Additionally, X represents that, at all times on and after Date 3, X has owned all of the
outstanding stock of Sub 1 and Sub 1 has owned all the outstanding stock of Sub 3. X
intended for Sub 3 to be treated as a QSub, effective Date 3. However, due to
inadvertence, X failed to file Form 8869, Qualified Subchapter S Subsidiary Election
(Form 8869).

X represents that the circumstances resulting in the ineffectiveness of X's QSub
elections were inadvertent and were not motivated by tax avoidance or retroactive tax
planning. Additionally, X represents that at all times since Date 2, X and its
shareholders have filed federal income tax returns consistent with X having a valid S
corporation election in effect. X also represents that at all times since Date 3, X and its
shareholders have filed federal income tax returns consistent with Sub 1, Sub 2, Sub 3,
and Sub 4 as having valid QSub elections in effect and since Date 4 with Sub 5 as
having a valid QSub election in effect.

Law and Analysis

Section 1361(a)(1) of the Code provides that the term “S corporation” means, with
respect to any taxable year, a small business corporation for which an election under
§ 1362(a) is in effect for such year.

Section 1361(b)(1) defines a “small business corporation” as a domestic corporation
which is not an ineligible corporation and which does not (A) have more than 100
shareholders, (B) have as a shareholder a person (other than an estate, a trust

PLR-105938-17                                 3

described in § 1361(c)(2), or an organization described in § 1361(c)(6)) who is not an
individual, (C) have a nonresident alien as a shareholder, and (D) have more than 1
class of stock.

Section 1361(b)(3)(A) 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 held by an S
corporation, and the S corporation elects to treat the corporation as a QSub.

Section 1.1361-3(a) of the Income Tax Regulations provides the time and manner for
making a QSub election. A taxpayer makes a QSub election with respect to a subsidiary
by filing Form 8869 with the appropriate service center 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.

Section 1362(f) provides that if (1) an election under § 1362(a) by any corporation (A)
was not effective for the tax 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 paragraph (2) or (3) of § 1362(d); (2)
the Secretary determines that the circumstances resulting in such ineffectiveness or
termination were inadvertent, (3) no later than a reasonable period of time after
discovery of the event resulting in the ineffectiveness or termination, steps were taken
(A) so that the corporation is a small business corporation, or (B) to acquire the required
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) as may be required by the Secretary with respect to such period, then,
notwithstanding the circumstances resulting in such ineffectiveness or termination, the
corporation shall be treated as an S corporation during the period specified by the
Secretary.

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 an election. Section
301.9100-2 provides automatic extensions of time for making certain elections. Section
301.9100-3 provides extensions of time for regulatory elections that do not meet the
requirements of § 301.9100-2.

Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 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 the taxpayer

PLR-105938-17                                 4

acted reasonably and in good faith, and the grant of relief will not prejudice the interests
of the Government.

Conclusion

Based solely on the facts submitted and representations made, we conclude that X’s
elections to treat Sub 1, Sub 2, Sub 4, and Sub 5 were ineffective. We also conclude
that the circumstances resulting in the ineffectiveness of X’s QSub elections for Sub 1,
Sub 2, Sub 4, and Sub 5 were inadvertent within the meaning of § 1362(f). Accordingly,
Sub 1, Sub 2 and Sub 4 will be treated as a QSubs effective Date 3 and thereafter and
Sub 5 will be treated as a QSub effective Date 4 and thereafter, provided Sub 1, Sub 2,
Sub 4, and Sub 5 are otherwise eligible to be treated as QSubs.

In addition, we conclude that X has satisfied the requirements of § 301.9100-3 with
respect to a late QSub election for Sub 3. As a result, provided that X makes a QSub
election for Sub 3 by filing a completed Form 8869, effective Date 3, 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, effective Date 3.

Except as specifically ruled above, we express or imply no opinion concerning the
federal tax consequences of the facts described above under any other provision of the
Code, including whether X was otherwise eligible to be an S corporation and whether
Sub 1, Sub 2, Sub 3, Sub 4, and Sub 5 were otherwise valid QSubs.

With regard to any defective consents to X’s S corporation election, we suggest you
attempt to perfect such consents through the procedure described in § 1.1362-6(b)(iii).

This ruling is directed only to the taxpayer who requested it. According to § 6110(k)(3),
this ruling may not be used or cited as precedent.

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Pursuant to the power of attorney on file with this office, we are sending a copy of this
letter to X’s authorized representatives.




                                      Sincerely,

                                      Joy C. Spies

                                      Joy C. Spies
                                      Senior Technician Reviewer, Branch 1
                                      Office of the Associate Chief Counsel
                                      (Passthroughs & Special Industries)

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