X, an S corporation, owns 100 percent of the stock of Y, a corporation for which a QSub election is in effect. Z, an unrelated C corporation, acquires 100 percent of the stock of Y.
The deemed formation of Y by X, as a consequence of the termination of Y’s QSub election, is disregarded for Federal income tax purposes. The transaction is treated as a transfer of the assets of Y to Z, followed by Z’s transfer of these assets to the capital of Y in exchange for Y stock.
Furthermore, if Z is an S corporation and makes a QSub election for Y effective as of the acquisition, Z’s transfer of the assets of Y in exchange for Y stock, followed by the immediate liquidation of Y as a consequence of the QSub election, are disregarded for Federal income tax purposes.
Z, an unrelated C corporation, acquires 100 percent of the stock of Y, terminating Y’s QSub election.
The transaction is treated as a transfer of Y’s assets to Z, rather than a stock purchase, for Federal income tax purposes.
Z is then treated as transferring those assets to the capital of Y in exchange for Y stock under section 351.
If Z is an S corporation and makes a QSub election for Y, the intermediate steps are disregarded for Federal income tax purposes.
