Moving a QSub to a new holding company

Client owns 100% of the stock in X, an S corporation. X owns 100% of the stock of Y, a QSub.

The client wishes to make Y a QSub of Z, a new S corporation formed to be a holding company, effective 1/1/20.

X will distribute all of Y's stock to my client, terminating the existing QSub election effective 1/1/20. We will file a new QSub election in order to make Y the Qsub of Z effective 1/1/20.

Normally, it seems that you can't file a new S election or new Qsub election for 5 years after a Qsub terminates. But Regs Section 1.1361-5(c)(2) allows for an exception, this is the same as example 1. I have a few questions though:

1. Do I need to file a new S election for Y?
2. How will the IRS know that an exception applies to the 5 year rule? Do I attach some kind of narrative to the QSub election?
3. The IRS won't be made aware that Y's stock is distributed to the client until X's 2020 tax return is filed in 2021, but I need to file the QSub election for Y soon. How will the IRS know that we have terminated the QSub election by distributing the stock? From their perspective, they will be seeing a QSub election for an entity that is already a QSub. Attach narrative to Qsub election? Or maybe a new S election informs them?

Thanks again...

The election is made by the parent Z, to treat sub as a qsub.
So the election was made by X the new election is by Z.
I think by simply making the election the IRS is informed that Z now owns Y and nothing else is necessary.

Isn't there a concept that, where no Subchapter S rules say differently, then Subchapter C rules apply? And, if my understanding of QSubs is correct, they are sort of (actually?) disregarded, and their assets and liabilities are viewed as those of the "real" S corp. If so, then the real one has distributed property and got rid of liabilities(?), all of which have tax implications. Here's a good article. The last section covers it, but the whole article may interest you. https://www.forbes.com/sites/anthonynit ... 6f0fdf6a22

I hasten to add that I have not looked for whether some exceptions may apply here. Maybe something in reg. 1.1361-5(b).

RR 2004-85 may be on point.

I agree that there are tax implications. My concern when my client came to me with this at the end of last year and wanted to do this effective 12/31/2019 was that the distribution of Y's stock out of X would be treated as a distribution of assets. Y owns unrealized receivables which I was concerned would cause X to recognize income when they are distributed to my client. This is why I asked him to wait until 1/1/20, because those receivables would be realized by the end of 2020 anyway. Thank you for the links, I will review them.