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...