IRS grants 120 extra days to make a late QSub election for a subsidiary the taxpayer forgot to elect

Plain-English summary

An S corporation (X) acquired a chain of companies. One of them (Sub 1) was itself an S corporation that owned a lower-tier company (Sub 2) treated as a qualified subchapter S subsidiary, or QSub. When X bought Sub 1, it timely filed a QSub election for Sub 1 but, by oversight, never filed the required QSub election for Sub 2. X asked the IRS for relief under the "9100" regulations, which let the IRS grant more time to make a missed election. The IRS agreed, finding that the failure was inadvertent, that X acted reasonably and in good faith, and that granting relief would not harm the government. X gets 120 days from the letter's date to file Form 8869 for Sub 2. This matters because a QSub is ignored as a separate corporation for tax purposes, so fixing the missed election keeps the whole structure taxed as one S corporation as intended.

Ruling snapshot

• Question: Should the taxpayer get a late-election extension under § 301.9100-3 to file a QSub election for Sub 2?
• Outcome: Approved (120-day extension granted)
• Key authorities: IRC § 1361(b)(3); Treas. Reg. § 1.1361-3; Treas. Reg. §§ 301.9100-1 and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202325006 Third Party Communication: None
Release Date: 6/23/2023 Date of Communication: Not Applicable
Index Number: 1361.05-00, 1362.00-00,
1362.04-00, 9100.00-00 Person To Contact:
--------------------------, ID No. ----------------
----------------------------------------- -----------------
------------------------------------------ Telephone Number:
-------------------------- --------------------
------------------------ Refer Reply To:
---------------------------------- CC:PSI:B01
PLR-118831-22
Date:
March 28, 2023

                                             LEGEND

X = ------------------------------------------
EIN: ----------------

Sub 1 = -------------------------------
EIN: ----------------

Sub 2 = ---------------------------------
EIN: ----------------

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

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

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

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

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

Date 6 = ------------------

State = ---------

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

  This letter responds to a letter dated September 23, 2022, and additional

correspondence, submitted on behalf of X by its authorized representative, requesting
relief under § 301.9100-3 of the Procedure and Administration regulations to make a
late election for Sub 2 under § 1361 of the Internal Revenue Code (Code).

                                     FACTS

    According to the information submitted, Sub 1 was organized under the laws of

State on Date 1, and made an election to be an S corporation as of formation. Sub 2
was organized under the laws of State on Date 2. On Date 3, Sub 1 acquired Sub 2
and filed an election to treat Sub 2 as a qualified subchapter S subsidiary (QSub) of Sub
2 as of Date 3.

    X was organized under the laws of State on Date 4 and made an election to be

an S corporation as of formation. On Date 5, X acquired Sub 1 and intended to file
elections to treat Sub 1 and Sub 2 as QSubs effective Date 6. X filed a timely election
to treat Sub 1 as a QSub of X. However, due to inadvertence, X failed to timely file a
QSub election on behalf of Sub 2 to be effective Date 6.

   X represents that its failure to file a QSub election for Sub 2 was inadvertent and

not the result of tax avoidance or retroactive tax planning. X further represents that no
federal tax return of any person has been filed inconsistent with a valid QSub election
having been made for Sub 2 effective Date 6. X, Sub 1 and Sub 2 have agreed to make
any adjustments required by the Service consistent with the treatment of Sub 2 as a
QSub.

                              LAW AND ANALYSIS

   Section 1361(b)(3)(A) provides that, except as provided in regulations prescribed

by the Secretary, for purposes of the Code (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 "QSub" means any domestic

corporation which is not an ineligible corporation (as defined in § 1361(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 QSub.

    Section 1.1361-3(a)(1) of the Income Tax Regulations provides that the

corporation for which a 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)(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) 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 extensions 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.

                                 CONCLUSION

   Based solely upon the information submitted and 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 8869,
Qualified Subchapter S Subsidiary Election, with the appropriate service center on
behalf of Sub 2 effective Date 6. A copy of this letter should be attached to each Form
8869.

   Except as expressly provided herein, we express or imply no opinion concerning

the federal income tax consequences of the facts under any other provision of the
Code. Specifically, we express or imply no opinion on whether X met the definition of
an S corporation under § 1361(b)(1) or whether Sub 1 or Sub 2 met the definition of a
QSub under § 1361(b)(3).

   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.

  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.

                                 Sincerely,

                              By: __/s/____________________
                                  Laura C. Fields
                                  Branch Chief, Branch 1
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

Enclosure (1):
Copy of this letter for § 6110 purposes

cc: