X, an S corporation, owns 100 percent of the stock of Y, and Y owns 100 percent of the stock of Z. QSub elections are in effect with respect to both Y and Z.
Y transfers all of its Z stock to X. Because X is treated as owning the stock of Z both before and after the transfer of stock solely for purposes of determining whether the requirements of section 1361(b)(3)(B)(i) and § 1.1361-2(a)(1) have been satisfied, the transfer of Z stock does not terminate Z’s QSub election.
Because the stock of Z is disregarded for all other Federal tax purposes, no gain is recognized under section 311.
X owns Y and Y owns Z, with QSub elections in effect for both Y and Z, so all three are treated as one entity.
Moving Z’s stock from Y up to X does not change the fact that X is treated as the ultimate owner of Z.
Because the ownership requirement is still satisfied, Z’s QSub election does not terminate on the transfer.
Since the stock of Z is disregarded for other Federal tax purposes, the distribution does not trigger gain under section 311.
