S corporation Name Changes

A new revenue ruling provides guidance for S corporations that undergo a type F reorgani­zation where the operating S corporation becomes a qualified Subchapter S subsidiary (QSub) of a new holding corporation. It also explains which employer identification number (EIN) each entity is to use and provides guidance for corporations that have already engaged in such a transaction.

Background on F reorganizations. Code Sec. 368(a)(1)(F) provides that a reorganization includes a mere change in identity, form, or place of organization of one corporation, however effected. In the case of an F reorganization, the acquiring corporation is treated (for purposes of Code Sec. 381) just as the transferor corporation would have been treated if there had been no reorganization. (Reg § 1.381(b)-1(a)(2)) Under Code Sec. 381, a corporation that acquires the assets of another corporation in certain tax-free reorganizations or liquidations also carries over numerous tax items of the transferor (predecessor) corporation.

Rev Rul 64-250, 1964-2 CB 333, provides that when an S corporation merges into a newly formed cor­poration in a transaction qualifying as an F reorganiza­tion and the newly formed surviving corporation also meets the requirements of an S corporation, the reorga­nization does not terminate the S election.

Background on QSubs. An S corporation cannot have a corporate shareholder. (Code Sec. 1361(b)(1)(B), Reg § 1.1361-1(f)) This rule ordinarily prevents a subsidiary from being an S corporation. However, an S corporation can have an S corporation subsidiary if it owns 100% of the subsidiary's stock, the sub is not an ineligible corpo­ration, and the S corporation parent elects (on Form 8869) to treat the subsidiary as a QSub. (Code Sec. 1361(b)(3)(B), Reg § 1.1361-2, Reg § 1.1361-3) A QSub isn't treated as a separate corporation for federal tax pur­poses; rather, its assets, liabilities, and items of income, deduction, and credit are treated as those of the parent S corporation. (Code Sec. 1361(b)(3)(A), Reg § 1.1361-4)

Background on EINs. Rev Rul 73-526, 1973-2 CB 404, concludes that the acquiring corporation in an F reorganization should use the EIN of the transferor cor­poration. However, since its publication, the Code was amended to create QSubs. Also, for tax years beginning after Dec. 31, 2004, Congress amended Code Sec. 136 1 (b)(3)(E) to provide that, except to the extent provided by IRS, QSubs are not disregarded for purposes of information returns and for certain other pur­poses as provided in regs. For example, Reg § 1.1361­4(a)(7) provides that a QSub is treated as a separate cor­poration for purposes of employment tax and related reporting requirements (effective for wages paid on or after Jan. 1, 2009), and Reg § 1.1361-4(a)(8) provides that a QSub is treated as a separate corporation for pur­poses of certain excise taxes (effective for liabilities imposed and actions first required or permitted in peri­ods beginning on or after Jan. 1, 2008).

Issue addressed in two situations. Rev Rul 2008-18 looks at whether the S election terminates in either of the two transactions described in it and what the proper EINs are for the participating entities.

Transaction in situation 1.  B, an individual, owns all of the stock in Y, an S corporation. Y's FIN is 22­2222222. In Year 1, B forms Newco and contributes all of the Y stock to Newco. Newco meets the require­ments for qualification as an S corporation and timely elects to treat Y as a QSub, effective immediately fol­lowing the transaction, which qualifies as an F reorga­nization. In Year 2, Newco sells a 1% interest in Y to D.

Result in situation 1. Consistent with Rev Rul 64­250, Y's original S election does not terminate but con­tinues for Newco. Newco must obtain a new EIN. Y must retain its EIN (EIN 22-2222222) even though a QSub election is made for it and must use its original EIN any time the QSub is otherwise treated as a separate entity for federal tax purposes (including for employ­ment and certain excise taxes) or if the QSub election terminates. In Year 2, when Newco sells a 1% interest of Y to D, Y's QSub election terminates under Code Sec. 1361(b)(3)(C). Y must use its original EIN of 22­2222222 following the termination of its QSub election.

Transaction in situation 2. C, an individual owns all of the stock of Z, an S corporation. Z's EIN is 33-3333333. In Year 1, Z forms Newco, which in turn forms Mergeco. Pursuant to a plan of reorganization, Mergeco merges with and into Z, with Z surviving and C receiving solely Newco stock in exchange for Z stock. Newco meets the requirements for qualifica­tion as an S corporation and timely elects to treat Z as a QSub, effective immediately following the transaction, which qualifies as an F reorganization.

Result in situation 2. Consistent with Rev Rul 64­250, Z's original S election does not terminate but con­tinues for Newco. Newco must obtain a new EIN. Z must retain its EIN (E IN 33-3333333) even though a QSub election is made for Z and must use its original EIN any time the QSub is otherwise treated as a sepa­rate entity for federal tax purposes (including for employment and certain excise taxes) or if the QSub election terminates.

Effective date. Rev Rut 2008-18 applies to F reorga­nizations occurring on or after Jan. 1, 2009. For F reor­ganizations occurring on or after Mar. 7, 2008 and before Jan. 1, 2009, taxpayers may rely on Rev Rut 2008-18. IRS says it is aware that, before the effective date of Rev Rut 2008-18, some S corporations have undergone F reorganizations in a manner similar to those described in Situations I and 2 above in which the acquiring corporation continued to use the transferor corporation's EIN in an effort to comply with Rev Rut 73-526. In those cases, IRS says the acquiring corpora­tion should continue to follow Rev Rut 73-526 and use the transferor corporation's FIN, and furthermore, after the F reorganization, the transferor (QSub) should use the parent's EIN until such time the transferor (QSub) is otherwise treated as a separate corporation for feder­al tax purposes (including for employment and certain excise taxes) or until such time that the QSub termi­nates. At that time, the QSub must obtain a new FIN.