X, an S corporation, owns 100 percent of Y. A QSub election is in effect with respect to Y for 2001.
Effective on January 1, 2002, X revokes its S election. Because X is no longer an S corporation, Y no longer qualifies as a QSub at the close of December 31, 2001.
A QSub must be wholly owned by an S corporation parent, so the QSub election cannot survive the loss of the parent’s S status.
Only an S corporation can own a qualified subchapter S subsidiary, so the QSub election rises and falls with the parent’s S election.
When X revokes its S election effective January 1, 2002, it ceases to be an S corporation.
Y no longer qualifies as a QSub at the close of December 31, 2001, the day before the parent’s revocation is effective.
After the termination, X and Y are treated as separate C corporations rather than a single entity for tax purposes.
