Affiliated group members may elect S status under the SBJPA.
Under the new rule, an S corporation can have 100%-owned subsidiaries (both domestic and foreign). In addition, a subsidiary wholly owned by a parent S corporation can elect to be a qualified subchapter S subsidiary (QSSS). A QSSS is not treated as a separate corporation; all of its assets, liabilities, income items, deductions and credits are treated as those of the parent S corporation (i.e., the QSSS is essentially treated as a division of the parent S corporation). It appears that an S corporation can have multiple tiers of QSSSs (e.g., a subsidiary of a QSSS may also be a QSSS).
Upon electing QSSS status, the subsidiary is treated as liquidating under Secs. 332 and 337 immediately before the election is effective. The built-in gains tax and the LIFO recapture tax may apply if the subsidiary was previously a C corporation. (Note: The new law also clarifies that an S corporation is eligible to use Sec. 332 in liquidating a subsidiary, and join in a Sec. 338(g) or (h)(10) election on the purchase of a subsidiary.)
Under the new law, there is an opportunity to "mix and match" S corporations and C corporations within a business's organizational structure to maximize Federal, state and local, and international tax benefits. For example, if an S corporation is planning to see an asset subject to the built-in gains tax, shareholder-level tax on the gain may be deferred by contributing the asset to a C corporation. In addition, C corporation subsidiaries could be used to recognize state and local tax benefits and/or to reduce the corporation's and shareholder's compliance burdens. For example, if product set-up and delivery and/or warranty work are the activities creating multi-state nexus, it may be possible to move these operations into a C corporation subsidiary so that only the C corporation need file within a state. It may also be possible to achieve international tax savings by having an S corporation own foreign subsidiaries (e.g., as compared to branches).
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|Title Annotation:||Small Business Job Protection Act of 1996|
|Publication:||The Tax Adviser|
|Article Type:||Brief Article|
|Date:||Jan 1, 1997|
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