Discussion:Q sub election
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Discussion Forum Index --> Advanced Tax Questions --> Q sub election
Discussion Forum Index --> Tax Questions --> Q sub election
| 10 May 2008 | |
| We just obtained a new client, an S corp. The S corp purchased 100% of another S corp's stock in September of 2006. In reviewing the 2006 1120S, prepared by the company's prior accountant, it appears that the two firms were consolidated for tax purposes. No Q sub election had been filed. I've been researching the implications of this, and from what I've read it appears our client would need to request a PLR in order to get approval for a late filing Q sub election. Without the Q sub election, I am under the assumption that no consolidated return would have been allowed for 2006. We're in the process of working on the 2007 1120S and I want to make sure we have 2006 straightened out, and the Q sub issue clarified, before completing 2007. I'd appreciate some feedback from anyone who has experience with Q subs. This is the first time our small firm has encountered this. Thanks so much. | |
| 10 May 2008 | |
| Unless there is some relief allowing making a late Q Sub Election (similar to Rev Proc. 2004-48 for a late Sub S Election), the holding of target corporation stock by purchasing S Corp terminated Target's S Status due to the holding of Sub's stock by an ineligible shareholder. So your analysis is correct. An 1120 would need to be, or have been, filed for the Sub. | |
Seaside CPA (talk|edits) said: | 10 May 2008 |
If the parent S corp has filed Form 1120S no later than six months after its original due date (excluding extensions) for the year the Qsub election is first intended to take effect, it may obtain relief for the late QSub under Rev. Proc. 2003-43. This is obtained by filing Form 8869 with 3 attachments:
a. Stmt. establishing a resonable cause for the failure to timely file Form 8869. b. Stmt. that the corp. satisfies the QSub requirements of IRC Sec. 1361(b)(3)(B). c. Dated declaration signed by officer of Scorp that states: "Under penalties of perjury, I declare that, to the best of my knowledge and belief, the facts presented in support of this election are true,correct, and complete." The Form 8869 should have "Filed Pursuant to REV. PROC. 2003-43" typed at the top of the form. The Form 8869 with attachments must be filed within 24 months of the original due date of the Form 8869 for the first year the QSub election is to take effect. PPC's S Corp Tax Planning Guide has a good section on Q Subs. | |
| 13 May 2008 | |
| Thanks for the responses. So here's my issue with this now - the parent corp bought 100% of the stock of the sub on 9/15/06. In looking at the prior accountant's workpapers, it looks like he consolidated the two companies with only information for the sub from the date of the sale to the end of the year. There is no inclusion of January through 9/15 income and expenses. Also, no K-1 was issued to the prior owner of the stock for his proporational share of income/loss through 9/15. I am under the assumption that the new owner of the target company is responsible for filing the full-year tax return for the company. It also doesn't appear that Section 1377 election was made. Based on what I've read here in other threads, I am thinking that the company needs to do the following: 1. File Form 8869 as mentioned above for late Qsub election, 2. Amend 2006 1120S and include a Section 1377 election, and issue a K-1 to the prior owner. Does this seem like the right direction to take? Thanks. | |
| 13 May 2008 | |
| Linda, I take it this is the same client we were discussing in the other thread. There I said you would file only one 1120S for the year of ownership change; however, the facts you've stated here might bring us to a somewhat different answer.
If I understand this right, you have two corporations, Parent and Target. Both had valid S elections at the beginning of 2006. Parent acquired 100% of the stock of Target as of 9/15/06. Parent filed an 1120S for the year ended 12/31/06 including all of P's income and expenses for the entire year, plus T's income and expenses for the period from 9/15/06 onward. Was a return filed for T's period from 1/1/06 to 9/15/06? If so, that one is probably OK. If not, it needs to be filed, but it seems to me that would be the responsibility of the seller, rather than P. The acquisition of T at 9/15/06 results in either a termination of T's S election, or (if IRS approves the QSub election) a conversion of T to a QSub of P. Either way, I think a short period return is required for T for the pre-acquisition period. If the QSub election is approved, P's 1120S as filed seems right. It certainly should not include the pre-acquisition income and expenses of T. I think all you have to do is file the 8869 and cross your fingers for luck <G>. If the election is approved, you're OK. If not, you would need to amend P's 1120S to remove T's income and expenses, and file an 1120 for the short period for T. This is pretty much off the top of my head, so other opinions would be welcome! | |
Seaside CPA (talk|edits) said: | 13 May 2008 |
| I agree with Katie's above post. Target's income & expenses for 1-1-06 thru 9-15-06 would not be included in the parent's consolidated 2006 return. I agree that a short period return would need to be filed. | |
| 14 May 2008 | |
| Thanks so much. That seems to make more sense to me that the 1/1 - 9/15 income/expenses wouldn't be included. I don't know how my client would get his hands on the seller's books anyways. That was my concern with all of this, as well as having to do a major amending of the 2006 return. I won't worry about the seller's filing of the short return for 2006, then. But I'll definitely proceed with the Qsub election and see how that goes.
I appreciate all of your help very much. Thanks again. | |
