Affiliated group members may elect S status under the SBJPA.

• Author: MacDonough, Laura
• Position: Small Business Job Protection Act of 1996 - Brief Article

Under pre-Small Business job Protection Act of 1996 (SBJPA) law, a corporation that was a member of an affiliated group was prohibited from electing S status. Although there were numerous methods of breaking affiliation, those methods generally resulted in the loss of liability protection afforded by maintaining operations in separate legal entities or income recognition at the corporate and/or shareholder level. However, a provision of the SBJPA addressed these problems by repealing the prohibition.

Under the new rule, an S corporation can have 100%-owned subsidiaries (both domestic and foreign). In addition, a subsidiary wholly owned by a parent S corporation can elect to be a qualified subchapter S subsidiary (QSSS). A QSSS is not treated as a separate corporation; all of its assets, liabilities, income items, deductions and credits are treated as those of the parent S corporation (i.e., the QSSS is essentially treated as a division of the parent S corporation). It appears that an S corporation can have multiple tiers of QSSSs (e.g., a subsidiary of a QSSS may also be a QSSS).

Upon electing QSSS status, the subsidiary is treated as liquidating under Secs. 332 and 337 immediately before the election is effective. The built-in gains tax and the LIFO recapture tax may apply if the subsidiary was previously a C corporation. (Note: The new law...