Because these elections allocate only the total earnings of the tax year from the dates shares are owned, the future income/loss is being allocated to those shareholders, and only those shareholders, who still have ownership in the S corporation after the transfer date.
Example 1: S (seller) and B (buyer) are the only shareholders in S corporation SB, Inc.
It is important for tax practitioners to see these elections not necessarily as a tax-saving technique; rather, they should be viewed as a means to bring certainty to the individual shareholders by closing the books on the transaction date and allowing the selling shareholders to be allocated income earned only while they held their interest in the S corporation.
If an S corporation wants to treat its wholly owned domestic subsidiary as a flowthrough entity, it could elect QSub status for the subsidiary on Form 8869, Qualified Subchapter S Subsidiary Election.
334(b), and the stock basis the S corporation previously had in the subsidiary "disappears.
If the S corporation acquired a target's stock in a taxable stock acquisition and elected QSub status for the target, the assets' fair market values (FMV) may exceed their adjusted tax basis.
The built-in-gains (BIG) tax can be triggered on disposition of an asset that had unrealized appreciation when it was transferred from a C corporation to an S corporation in a carryover-basis transaction (Sec.
In addition to the pass0through gain and BIG tax concerns, an S corporation that acquires a C target with E&P could subject the S shareholders to ordinary dividend treatment if it elects QSub status for the C target.
Since for federal tax purposes, the LLC is "disregarded," the shareholder is deemed to own all of its S corporation stock; therefore, it is the sole owner of the limited partnership.
The shareholders may have been trying to limit the liability associated with their S corporation ownership because it is based on their limited partnership interest and LLC membership.
This ruling may provide CPAs with planning opportunities for clients who are S corporation shareholders in similar situations, but the lack of specific business reasons for such an arrangement may make it difficult to determine when this may be most useful.
It concluded that U was thus treated as an S corporation
immediately after the merger, and the reorganization did not terminate X's election to treat Sub1 as a QSub.