Tax on a liquidating distribution Chat room pereira sex
Afterwards, X made an election to treat Sub as a QSub effective on Date 4.
X’s election to treat Sub as a QSub was considered ineffective, because Sub did not meet the QSub eligibility requirements of Sec.
Following the contribution, a Qualified Subchapter S Subsidiary (QSub) election is made to treat the Target as a disregarded entity for income tax purposes.
This strategy follows the model established by Revenue Ruling (Rev.
1362(f), concluding that Sub will be treated as a QSub effective on Date 4. 2008-24013 does not disclose the time period that elapsed between the transfer of Sub’s (, New Co) and the conversion of Sub to an LLC.
This PLR highlights that “F” Reorganizations described in Rev. 2008-18 can bring about a potential “compliance trap”: a QSub election filed “timely, but too late,” with potentially adverse tax consequences where inadvertent termination relief is not pursued or not granted. If no significant time period elapsed since the stock transfer, then the LLC conversion could be viewed as part of an overall plan of reorganization for the transfer of assets from Target to New Co and the liquidation of Target for federal income tax purposes.
Download PDF Version Pre-transaction restructuring for S Corporations using the “F” Reorganization has become a very commonly used technique, especially for Private Equity (PE) firms that wish to acquire a closely-held corporation (the transferee corporation or “Target”) in transactions that require tax-free rollover equity.
The “F” Reorganization structure involves the formation of a new S Corporation (the resultant corporation or “New Co”), followed by a contribution of the stock of the Target into New Co in exchange for New Co stock.
A partnership is then created by either distributing a nominal, , 1% interest in the LLC to one of the shareholders of the S Corporation, or by compensating a key employee with a nominal interest in the LLC.the IRS held that when an S Corporation merges into a newly-formed corporation in a transaction that qualifies as an “F” Reorganization, and the newly-formed surviving corporation also qualifies as an S Corporation, the reorganization will not terminate the S election, and the S election remains in effect for the new corporation. 2008-18: “F” Reorganizations involving QSubs In Rev. 2008-18, the IRS held that where the shareholders of an existing S Corporation (Target) cause it to become the wholly-owned subsidiary of a new S Corporation holding company (New Co) owned by the same shareholders, and New Co timely elects to treat Target as a QSub effective immediately following the transaction, these steps are treated as an “F” Reorganization under Sec. The requirements for an “F” Reorganization are met, with New Co continuing the tax attributes of Target, because Target is treated as a QSub and disregarded for income tax purposes, and all of its activity is treated as occurring within the newly-formed entity. On Date 4, as part of a transaction intended to qualify as an “F” Reorganization, Sub’s shareholders contributed all of their stock in Sub to X, thereby causing Sub to become a wholly-owned subsidiary of X.This principle of continuity of the election has been amplified by Rev. 2008-18, which addresses certain “F” Reorganizations involving QSubs. Sub then converted to an LLC under state law on Date 5, and by default was treated as a disregarded entity for federal tax purposes.Rul.) 2008-18, and is often the strategy of choice where the parties wish to avoid potential tax or structural inefficiencies.For example, if rollover equity is desired in a tax-free manner by the seller(s), and if the PE firm wishes to obtain a cost basis in the assets acquired, this strategy often precedes the conversion of the QSub to a single-member limited liability company (SMLLC), which is also a disregarded entity for tax purposes.
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Since the owners would prefer to hold a pass-through entity to afford a single level of tax on a subsequent asset sale at capital gains tax rates, the QSub is typically converted to a SMLLC immediately prior to the sale. However, a new employer identification number (EIN) is generally required for New Co, while Target (now a QSub) retains its existing EIN. 1362(f) for an inadvertently invalid QSub election where the defect related to the timing of the election. The PLR describes the following fact pattern: Effective on Date 1, “X” was organized and elected to be an S Corporation effective that date.