A qualified Subchapter S subsidiary (QSub) is a subsidiary corporation 100% owned by an S corporation that has made a valid QSub election for that subsidiary. In addition to being 100% owned by an S corporation, a QSub must be a domestic corporation that otherwise qualifies to be an S corporation.
When a parent S corporation makes a QSub election for an existing corporation (whether or not the subsidiary’s stock is acquired from another person or previously held by the S corporation), the subsidiary is generally deemed to have engaged in a tax–free liquidation under Secs. 332 and 337 if the relevant requirements are met (Regs. Sec. 1.1361–4(a)(2)). Thus, where a QSub election is made for an insolvent subsidiary, the deemed…
