Common use of Special rules for acquired S corpora- tions Clause in Contracts

Special rules for acquired S corpora- tions. Except as provided in paragraph (b)(4) of this section, if a corporation (Y) for which an election under section 1362(a) was in effect is acquired, and a QSub election is made effective on the day Y is acquired, Y is deemed to liq- uidate into the S corporation at the be- ginning of the day the termination of its S election is effective. As a result, if corporation X acquires Y, an S cor- poration, and makes an S election for itself and a QSub election for Y effec- tive on the day of acquisition, Y liquidates into X at the beginning of the day when X’s S election is effec- tive, and there is no period between the termination of Y’s S election and the deemed liquidation of Y during which Y is a C corporation. Y’s taxable year ends for all Federal income tax pur- poses at the close of the preceding day. Furthermore, if Y owns Z, a corpora- tion for which a QSub election was in effect prior to the acquisition of Y by X, and X makes QSub elections for Y and Z, effective on the day of acquisi- tion, the transfer of assets to Z and the deemed liquidation of Z are dis- regarded. See §§ 1.1361–4(a)(2) and 1.1361– 5(b)(1)(i).