IRS Grants Relief for Late QSub Election Due to Inadvertence

IRS Grants Relief After Parent Corporation Misses QSub Deadline

The IRS has granted Taxpayer X, a parent S corporation, an extension to elect Qualified Subchapter S Subsidiary (QSub) status for its subsidiary, Y. The ruling addresses a missed election deadline attributed to inadvertence, providing relief under Treasury Regulation § 301.9100-3. This regulation outlines the standards for granting extensions for regulatory elections when a taxpayer has missed the original deadline.

Inadvertent Error and Consistent Reporting

The situation arose when Taxpayer X acquired Taxpayer Y, with the intention of treating Y as a Qualified Subchapter S Subsidiary (QSub). Under Section 1361(b)(3)(B) of the Internal Revenue Code, a QSub is a domestic corporation that is not an ineligible corporation, where an S corporation parent holds 100% of the stock and elects to treat it as a QSub. However, Taxpayer X failed to file Form 8869, the election form for QSub status.

Taxpayer X represented to the IRS that this failure was inadvertent and not the result of tax avoidance or retroactive tax planning. Critically, Taxpayer X represented that both it and Taxpayer Y had filed all tax returns and reported all tax items consistent with the tax treatment of Y as a QSub for all relevant years since the acquisition date. This consistent behavior, despite the absence of a formal election, was a key factor supporting the claim of inadvertence.

The 'Good Faith' Standard for Late Elections

The IRS's decision hinged on the application of Treasury Regulation § 301.9100-3, which governs extensions of time for making certain regulatory elections. This regulation is relevant because a Qualified Subchapter S Subsidiary (QSub) election is considered a regulatory election.

A QSub, as defined in Section 1361(b)(3)(B), is a domestic corporation that is 100% owned by an S corporation parent, and which the parent elects to treat as a QSub. For tax purposes, Section 1361(b)(3)(A) dictates that a QSub is not treated as a separate corporation; instead, its assets, liabilities, and items of income, deduction, and credit are treated as belonging to the S corporation parent.

Under Reg. § 301.9100-3, the Commissioner may grant an extension when the taxpayer demonstrates that they acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. The IRS concluded that Taxpayer X met this standard. The fact that Taxpayer X and Taxpayer Y consistently reported their income in a manner consistent with QSub status, despite neglecting to file the election form for QSub status, supported the claim that the failure to file Form 8869 was inadvertent.

Ruling and Remedial Action

Having determined that Taxpayer X met the requirements of Treasury Regulation § 301.9100-3, which outlines the standards for granting an extension of time to make certain regulatory elections, the IRS granted relief. Specifically, Taxpayer X has 120 days from the date of the Private Letter Ruling to file Form 8869, the election form for Qualified Subchapter S Subsidiary (QSub) status, with the appropriate service center for Subsidiary Y, effective as of Date 2. A copy of the PLR must be attached to Form 8869 when filed.

While this ruling is non-precedential under Internal Revenue Code § 6110(k)(3), which states that private letter rulings cannot be used or cited as precedent, it reinforces the IRS's general leniency regarding missed regulatory elections when a taxpayer has acted consistently with their intended tax status.