X, an S corporation, owns 100 percent of Y, a corporation for which a QSub election is in effect. Z, the common parent of a consolidated group of corporations, acquires 80 percent of the stock of X on June 1, 2002. Z does not make an election under section 338(g) with respect to the purchase of X stock.
X’s S election terminates as of the close of the preceding day, May 31, 2002. Y’s QSub election also terminates at the close of May 31, 2002.
Under § 1.1502-76(b)(1)(ii)(A)(2) and paragraph (a)(3) of this section, X and Y become members of Z’s consolidated group of corporations as of the beginning of the day June 1, 2002.
When Z acquires 80 percent of X, X has an ineligible shareholder and can no longer qualify as an S corporation.
X’s S election terminates at the close of May 31, 2002, the day before the acquisition is effective.
Because X is no longer an S corporation, Y’s QSub election also terminates at the close of May 31, 2002.
X and Y become members of Z’s consolidated group as of the beginning of June 1, 2002.
