Subsidiary received QSub relief after the parent corrected incomplete ownership

Plain-English summary

An S corporation elected to treat a subsidiary as a qualified subchapter S subsidiary, but the election was ineffective because the parent did not own all of the subsidiary's stock. After discovering the problem, the parent took steps to obtain 100-percent ownership. It represented that the mistake was inadvertent, was not tax-motivated, and that its returns had consistently treated the subsidiary as a QSub. The IRS granted relief under section 1362(f) and treated the subsidiary as a QSub from the intended effective date, provided the election was otherwise valid and was not later terminated.

Ruling snapshot

• Question: Could a subsidiary be treated as a QSub from the intended date even though its S corporation parent lacked 100-percent ownership when it filed the election?
• Outcome: approved
• Key authorities: IRC §§ 1361(b)(3) and 1362(f); Treas. Reg. § 1.1361-3(a)(1)

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 202352001                                             [Third Party Communication:
Release Date: 12/29/2023                                      Date of Communication: Month DD, YYYY]
Index Number: 1362.04-00
                                                              Person To Contact:
---------------------------------------------                 ---------------------, ID No. -----------------
-----------------------------------------                     Telephone Number:
-------------------------------                               ---------------------
-----------------------                                       Refer Reply To:
--------------------------------------                        CC:PSI:B03
                                                              PLR-103596-23
                                                              Date:
                                                              August 17, 2023




LEGEND

A                =        --------------------
                 --------------------------

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

Sub              =        ------------------------------------------------------------------------------------------
                         ------------------------------------------------------------

State 1          =        -------------

State 2          =        --------

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

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

Date 3           =        -------




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

       This letter responds to a letter dated February 10, 2023, and subsequent
correspondence, submitted on behalf of X by its authorized representative, requesting a
ruling under § 1362(f) of the Internal Revenue Code (Code).

PLR-103596-23                                 2

                                         FACTS

       The information submitted states that X, a State 1 limited partnership that had
elected to be an association under § 301.7701-3 of the Procedure and Administration
Regulations effective Date 1, elected to be an S corporation effective Date 2.
Additionally, X elected to treat its subsidiary, Sub, a State 2 limited partnership that had
elected to be an association under § 301.7701-3 effective Date 1, as a qualified
subchapter S subsidiary (QSub) effective Date 2. In Date 3, X learned that its election
to treat Sub as a QSub was ineffective because X did not own 100 percent of the stock
of Sub as required under § 1361(b)(3)(B)(i). X then took steps so that it owned 100
percent of the stock of Sub as required under § 1361(b)(3)(B)(i).

       X represents that its ineffective QSub election for Sub was inadvertent and was
not the result of tax avoidance or retroactive tax planning. X further represents that it
has filed its federal tax returns consistent with Sub being a QSub effective Date 2. X
and its shareholder, A, agree to make any adjustments that the Commissioner may
require consistent with the treatment of Sub 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 1362(f) provides that if (1) an election under §1362(a) or
§ 1361(b)(3)(B)(ii) by any 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) or § 1361(b)(3)(C), (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 circumstances resulting in
such ineffectiveness or termination, steps were taken (A) so that the corporation for
which the election was made or the termination occurred is a small business corporation
or a QSub, as the case may be, or (B) to acquire the required shareholder consents,

PLR-103596-23                                3

and (4) the corporation for which the election was made or the termination occurred,
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 QSub, as the case may
be) as may be required by the Secretary with respect to such period, then,
notwithstanding the circumstances resulting in such ineffectiveness or termination, such
corporation shall be treated as an S corporation or a QSub, as the case may be, during
the period specified by the Secretary.

                                    CONCLUSION

      Based solely on the facts submitted and representations made, we conclude that
X’s election to treat Sub as a QSub effective Date 2 was ineffective. We further
conclude that the circumstances resulting in the ineffectiveness of the QSub election for
Sub were inadvertent within the meaning of § 1362(f). Therefore, under the provisions
of § 1362(f), Sub will be treated as a QSub effective Date 2 and thereafter, provided the
QSub election was otherwise valid and was not terminated under § 1361(b)(3)(C).

      Except as specifically ruled above, we express or imply no opinion concerning
the federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, we express or imply no opinion on whether Sub
was otherwise eligible to be treated as a QSub.

     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.

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

PLR-103596-23                                            4

      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,


                                                  Mary Beth Carchia
                                                  Senior Technician Reviewer, Branch 3
                                                  Office of Associate Chief Counsel
                                                  (Passthroughs & Special Industries)


Enclosure:
     Copy of this letter for § 6110 purposes


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