Late QSSS election relief.

• Author: Smith, Greg W.
• Position: Qualified Subchapter S subsidiary

The Small Business job Protection Act of 1996 liberalized the rules applicable to S corporations and affiliated groups. For tax years beginning after 1996, an S corporation is permitted to own any percentage of another corporation. Under prior law, an S corporation was not permitted to own 80% or more of another corporation (i.e., it could not be part of an affiliated group). If a subsidiary corporation is a wholly owned domestic corporation that qualities as an S corporation, the parent S corporation may elect to treat the subsidiary as a qualified subchapter S subsidiary (QSSS). A QSSS is not treated as a separate corporation for Federal income tax purposes. It is treated as a branch of the parent S corporation, thus maintaining a single level of tax. If the subsidiary corporation is not eligible to become a QSSS or the parent neglects to timely elect to treat it as such, it is required to file a separate C corporation tax return (and therefore, is subject to two layers of tax).

Notice 97-4 provides temporary guidance for making QSSS elections. Form 966, Corporate Dissolution or Liquidation, must be filed within 75 days of the desired effective date. The notice does not provide for an extension of time to file Form 966 or provide any guidance for the relief of late elections.

Letter Ruling 9748024

The IRS has granted an S corporation an extension of time to elect under Sec. 1361(b)(3)(B) to treat a subsidiary as a QSSS, even though the 75-day time limitation had expired. In Letter Ruling 9748024, the taxpayer neglected to make timely elections for 25 different subsidiaries (i.e., within 75 days of the desired effective date). The Service granted a 30-day extension from the date of the ruling to make the QSSS elections under Regs. Sec. 301.9100-1.

Under Regs. Sec. 301.9100-1(f), the IRS may grant a reasonable extension of time to make a regulatory election, or certain statutory elections but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Code, except subtitles E, G, H and I, if the taxpayer demonstrates to the Service's satisfaction that the taxpayer acted reasonably and in good faith, and that granting the relief will not prejudice the interests of the government.

Requests for relief under Regs, Sec. 301.9100-1 will be...