Thus, for example, if an S corporation forms a subsidiary and makes a valid QSub election (effective upon the date of the subsidiary's formation) for the subsidiary, the transfer of assets to the subsidiary and the deemed liquidation are disregarded, and the corporation will be deemed to be a QSub from its inception.Corporation X acquires all of the outstanding stock of solvent corporation Y from an unrelated individual for cash and short-term notes.
For a business reason such as segregation of assets and liabilities or maintenance of contractual obligations, it may be prudent to establish certain S corporation operations in a separate subsidiary.
However, an S corporation may not have another corporation as a shareholder.
QSub elections became available because Congress understood that there were situations in which taxpayers wished to separate different trades or businesses into different corporate entities.
Congress believed that, in such situations, shareholders should be allowed to arrange these separate corporate entities under parent-subsidiary arrangements as well as under brother-sister arrangements.
195 election, if it expands into a different industry or segment, such as wholesaling or retailing.