Effect of installment method on QSubs and other ignored entities.

• Author: Bakale, Anthony
• Position: Qualified subchapter S subsidiaries

Recently, practitioners have been making use of qualified subchapter S subsidiaries (QSubs) or other ignored entities to reduce clients' administrative filing burdens for separate entities. Although this may not be the primary and only reason to use a QSub (or other ignored entity), it is one that may offer a great deal of savings through reduced compliance costs. For many years, taxpayers with separate lines of business or divisions sought to isolate or separate their activities for legal protection. Keeping separate lines of businesses in separate legal entities has generally limited the liability and exposure to that separate activity. Taxpayers have formed separate legal companies to hold or conduct a specific trade or business. Although the result is what the taxpayer intended, most did not contemplate the additional administrative time and compliance costs associated with the newly formed entities.

Criticisms of this compliance-driven system aided in the enactment of legislation to ease the administrative costs of filing. In response to these criticisms, Congress has responded with the introduction of QSubs, and the IRS with the ignored-entities concept (such as the single-member limited liability company).

Despite the rule that an S corporation cannot normally have a corporate shareholder, an S parent may have a QSub. A QSub is a domestic corporation not otherwise ineligible to be an S corporation and 100% owned by an S parent that the S corporation elects to treat as a QSub (see Tax Clinic, "Final QSub Regs," TTA, May 2000, p. 320, for further explanation and other QSub tax issues). The collapsing of brother-sister S corporations into an S parent with QSubs may seem to be relatively inconsequential from a tax standpoint. However, prior to advising a client to contribute stock of a cash-basis, stand-alone S corporation to a sister holding company, an adviser should consider that the QSub structure might create an unexpected result when considering the sale of the cash-basis QSub in the future.

With the recent change in law under Sec. 453(a)(2), the installment method can no longer be used by accrual-method taxpayers for sales of property after Dec. 16, 1999, with few exceptions. The change has created much controversy and outcry from practitioners and other organizations. As a result, the Service has responded with Rev. Proc. 2000-22, which exempts certain taxpayers with annual gross receipts of $1 million or less from the...