QSub checklist.

• Position: Subchapter S subsidiary

Sec. 1361 (b)(3)(B) defines a qualified subchapter S subsidiary (QSub) as any domestic corporation that is not an ineligible corporation (i.e., certain banks, insurance companies, domestic international sales corporations and corporations claiming a possessions tax credit), if:

1. An S corporation holds 100% of the corporation's stock and

2. The S corporation parent elects to treat the subsidiary as a QSub.

Except for certain banks, a corporation for which a QSub election has been made will not be treated as a separate corporation for Federal tax purposes--even though it remains a separate legal corporate entity under state law. Instead, all of a QSub's assets, liabilities and items of income, deduction and credit are treated as belonging to the parent S corporation. The computation of taxable income or loss, built-in gains, passive investment income and other Federal tax items, as well as the characterization of distributions, is generally determined by the parent on an aggregate basis.

Although this provision has been in effect for over seven years, many tax practitioners are still unfamiliar with it. The AICPA Tax Division's S Corporation Taxation Technical Resource Panel believes that if CPAs better understand the uses and mechanics of QSubs, they will better serve their clients.

The QSub Checklist below has been developed to help achieve this goal; it is part of a QSub Practice Guide available to AICPA Tax Section members at www.cpa2biz.cons/ResourceCenters/Tax/S+Corps/default.htm.

QSub Checklist Yes No Comments 1. Examples of QSub use * Will an aggregation of stockholder basis facilitate the current flowthrough of losses for losses for the current tax year? -- -- * Will on aggregation of stockholder basis facilitate the use of suspended losses created in created in prior years? -- -- * Will an aggregation of stockholder debt basis facilitate the current flowthrough of losses for One current tax year? -- -- * Will an aggregation of stockholder debt basis facilitate the use of suspended losses created in prior years? -- -- * Should a brother-sister group of S corporations be restructured and a QSub election made to avoid intercompany loans? -- -- * Will the QSub election reduce or eliminate the parent/subsidiary's taxable income for Sec. 1374 purposes and defer the application of the built-in gains (BIG) tax? -- -- * Will the QSub election reduce the parent's portion of grass receipts attributed to passive investment income below 25%, thereby protecting the parent's S status and shielding it from the excess passive income tax? -- -- * Will the QSub election reduce or eliminate the parent/subsidiary's taxable income for Sec. 1375 purposes and shield the parent From the excess passive imam tax? -- -- * Will u QSub election made for a C corporation subsidiary accelerate the use of its losses incurred after the election's effective date? -- -- This technique has not been addressed in rulings, etc., and is net advisable if an S corporation were formed specifically for this purpose. * Can a QSub be used to facilitate a like-kind exchange and avoid possible exposure to state and local real estate transfer taxes? -- -- * Is the existing S corporation planning to expand or acquire another business? -- -- If YES, the QSub may provide the opportunity to currently deduct expansion costs under Sec. 162. The QSub may also allow the parent to segregate business operations end related liabilities from its primary business operations. The parent may use u QSub to facilitate a tax-free merger or consolidation under Sec 368(a)(1)(A). * Is the parent considering selling a portion...