Rev. Rul. 2008-18: F Reorganizations, QSub Elections, and EIN Assignment

Revenue Ruling 2008-18 answers three questions that come up when an existing S corporation is placed under a newly formed parent holding company through an F reorganization under Section 368(a)(1)(F). The S election carries over to the new parent without a new Form 2553. The old corporation becomes a Qualified Subchapter S Subsidiary once the parent files Form 8869. And the new parent must obtain a fresh Employer Identification Number, while the old corporation keeps its original EIN.¹ That last point reversed prior guidance and is where most of the confusion sits.

The Two Transaction Structures Covered

The ruling describes two ways of getting to the same place, and reaches identical conclusions for both.

In the first, the sole shareholder of an existing S corporation forms a new corporation (“Newco”) and contributes all of the S corporation’s stock to Newco. Newco then elects to treat the old S corporation as a QSub.

In the second, the S corporation forms Newco, which forms a merger subsidiary. The merger subsidiary merges into the original S corporation, which survives, and the shareholder receives Newco stock. Newco then makes the QSub election for the surviving corporation.

Both qualify as F reorganizations because each is a mere change in identity, form, or place of organization of a single corporation, with no shift in ownership or business operations.² The guidance below applies to either method.

The S Election Carries Over to the New Parent

The S election does not terminate. Relying on Revenue Ruling 64-250, the IRS concluded that the original corporation’s S election continues for the new parent without interruption.¹ Because an F reorganization is treated as a mere change in form, the new parent is the same taxpayer as the original corporation for federal income tax purposes. No new Form 2553 is required.³

This continuity matters for two reasons. First, a corporation that loses its S election normally cannot re-elect for five taxable years without IRS consent.⁴ The F reorganization route avoids that wait. Second, the tax year does not close on the reorganization date. Under the Section 381 regulations, the acquiring corporation in an F reorganization steps into the transferor’s shoes, so the normal rule that ends the transferor’s tax year on the transfer date does not apply.⁵

The QSub Election Must Actually Be Filed

Once the original S corporation is wholly owned by the new parent, it qualifies for treatment as a Qualified Subchapter S Subsidiary under Section 1361(b)(3)(B). A QSub is a domestic corporation whose stock is 100 percent owned by an S corporation and for which the parent has elected QSub treatment.⁶ Once effective, the subsidiary is generally disregarded as a separate entity for income tax purposes, and its assets, liabilities, income, and deductions are treated as the parent’s.

The election is not automatic. The parent must file Form 8869. The ruling’s facts state that Newco “timely elects to treat” the old corporation as a QSub, and the IRS considers the QSub election a critical component of the F reorganization itself.¹ The Form 8869 instructions include a specific checkbox for elections made under Section 368(a)(1)(F) and Rev. Rul. 2008-18.³ If the QSub election is invalid, the entire transaction can fail to qualify as an F reorganization, which unravels the S election continuity as well.

The requested effective date generally cannot be more than 12 months after filing or more than two months and 15 days before filing. For the reorganization to work as intended, the QSub election should be effective immediately after the stock transfer or merger.³

EIN Assignment: New Number for the Parent, Old Number Stays with the Subsidiary

This is the holding that catches people off guard, because it reversed earlier IRS guidance. Revenue Ruling 73-526 had said that in a standard F reorganization, the surviving corporation continues using the transferor’s EIN. Rev. Rul. 2008-18 reaches a different result when the old corporation continues to exist as a QSub: the new parent must obtain a new EIN, and the old corporation must retain its original one.¹

The reason is practical. Even though a QSub is disregarded for income tax purposes, it continues to exist as a separate entity for employment taxes and certain excise taxes. If the old corporation has payroll, it needs an EIN to file those returns. Stripping its EIN and giving it to the parent would create tracking problems, especially if the QSub election later terminates and the old corporation needs to resume filing its own income tax returns.

The regulation governing QSub identifying numbers sets up a three-part framework:

Any entity that already has an EIN retains that number when a QSub election is made.⁷
While the QSub election is in effect, the QSub uses the parent’s EIN for federal tax purposes generally.⁷
The QSub uses its own retained EIN when it is treated as a separate entity, including employment and excise tax filings, and for any period after a QSub election terminates.¹

Getting this wrong is more than an administrative headache. Filing employment tax returns under the parent’s EIN when they should be under the QSub’s EIN can cause misapplied payments, mismatched W-2 reporting, and IRS notices that take months to untangle.

Tax Attributes and the Single Return

Because the reorganization qualifies under Section 368(a)(1)(F), the new parent inherits the original corporation’s tax attributes under Section 381. The regulation treats the acquiring corporation in an F reorganization “just as the transferor corporation would have been treated if there had been no reorganization.”¹ Net operating loss carryovers, accounting methods, capital loss carryovers, and other items listed in Section 381(c) all pass through.⁵ The Accumulated Adjustments Account, which tracks previously taxed S corporation earnings, carries over as well.

Because the tax year does not close, the parent files a single Form 1120-S covering the combined activity of the old corporation before the reorganization and the parent afterward. The return is due by the fifteenth day of the third month after the close of the tax year, meaning March 15 for a calendar-year corporation.⁸ The parent files under its new EIN, not the old corporation’s number. Because the corporate name on the return will differ from what the IRS has on file for the inherited S election, the parent should check the name-change box on Form 1120-S (Page 1, Line H, Box 2).⁹

Each corporation that is a party to the reorganization must include a statement with its return for the year of the exchange, titled “Statement Pursuant to § 1.368-3(a).” The statement must identify all parties by name and EIN, the date of the reorganization, and the value and basis of assets or stock transferred.¹⁰ Since the QSub is disregarded for income tax purposes, this statement is attached to the parent’s Form 1120-S.

Employment and Excise Tax Obligations of the QSub

Although the QSub is invisible for income tax purposes, federal regulations treat it as a separate corporation for employment and excise taxes. The regulation at 26 CFR 301.7701-2(c)(2)(iv) provides that the general disregarded-entity rule does not apply to taxes imposed under Subtitle C of the Internal Revenue Code, which covers Social Security, Medicare, federal unemployment, and income tax withholding.¹¹

If the old corporation employs workers, it continues to file Forms 941, 940, and W-2 under its own original EIN, not the parent’s. Payroll systems, withholding accounts, and state unemployment registrations all remain under the QSub’s EIN. This is the practical reason the ruling requires the old corporation to keep its number. When setting up payroll for the restructured group, confirm that the payroll provider is reporting under the QSub’s EIN for wage-related filings and the parent’s new EIN for the income tax return.

If QSub Status Later Terminates

QSub status can end if the parent sells even a small percentage of the subsidiary’s stock to a third party, or if the parent voluntarily revokes the election. The ruling itself illustrates this: in the stock-contribution scenario, the parent later sells a 1 percent interest in the subsidiary, which immediately terminates the QSub election.¹

When the election terminates, the former QSub is treated as a new corporation that acquired all of its assets and assumed all of its liabilities from the parent in exchange for stock, effective at the close of the day the triggering event occurs.¹² At that point the former QSub uses its retained original EIN for all tax purposes, including income tax.⁷

A corporation whose QSub election terminates generally cannot have a new S election or QSub election made for it for five taxable years. An exception applies if the corporation is otherwise eligible for the election immediately after termination and the new election is made effective right away.¹² Anyone planning a later sale of the subsidiary should model the tax consequences of the deemed asset transfer before the transaction closes, because the deemed formation can create unexpected gain recognition depending on the subsidiary’s inside basis.

1
Internal Revenue Service. Rev. Rul. 2008-18
2
Office of the Law Revision Counsel. 26 U.S. Code 368 – Definitions Relating to Corporate Reorganizations
3
Internal Revenue Service. Instructions for Form 8869
4
Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination
5
Office of the Law Revision Counsel. 26 USC 381 – Carryovers in Certain Corporate Acquisitions
6
Office of the Law Revision Counsel. 26 U.S. Code 1361 – S Corporation Defined
7
eCFR. 26 CFR 301.6109-1 – Identifying Numbers
8
Internal Revenue Service. Instructions for Form 1120-S
9
Internal Revenue Service. Business Name Change
10
eCFR. 26 CFR 1.368-3 – Records to Be Kept and Information to Be Filed with Returns
11
eCFR. 26 CFR 301.7701-2 – Business Entities; Definitions
12
Internal Revenue Service. Rev. Rul. 2004-85 – Termination of QSub Election