Revenue Ruling 79-23: S Corp Status in a Reorganization

IRS guidance provides clarity for a specific type of corporate restructuring, addressing the tax implications for an S corporation when it changes its state of incorporation. This ensures that corporations can anticipate the tax consequences of moving their legal home from one state to another.

The Reorganization Scenario

The guidance focuses on a transaction known as a “Type F” reorganization. This is a mere change in the identity, form, or place of organization of a single corporation. A common example is a corporation originally established in one state deciding to reincorporate in another state to take advantage of different corporate laws or for other business reasons.

The modern structure involves the shareholders of the existing S corporation forming a new corporation in the desired state. They then contribute their stock in the original corporation to the new corporation in exchange for stock in the new entity. Following this exchange, the new parent corporation makes an election to treat the original corporation as a Qualified Subchapter S Subsidiary (QSub).

This action raises a question for businesses that have elected to be taxed under Subchapter S of the Internal Revenue Code. The S corporation election allows a corporation’s income, losses, deductions, and credits to pass through to its shareholders for federal tax purposes. A concern is whether creating a new corporate entity, as part of the reorganization, automatically terminates this S election.

The Ruling’s Conclusion on S Corporation Status

A Type F reorganization does not terminate a corporation’s S election. The IRS’s reasoning is grounded in the nature of the reorganization itself. Because the transaction is merely a change in the place of organization, the new corporation is viewed as a continuation of the original one for tax purposes. The fundamental operations, assets, and ownership of the business remain unchanged.

The reorganization provisions of the tax code are designed to allow for business adjustments without immediate tax consequences when the owners’ underlying investment remains intact. Therefore, the S election, which is tied to the ongoing business enterprise and its owners, carries over to the newly chartered corporation without interruption.

Required Administrative Actions

While the S corporation status continues automatically, administrative steps are required to complete the reorganization properly. A point of clarification involves the corporation’s Employer Identification Number (EIN). The new successor corporation must obtain a new EIN, while the original corporation, which now operates as a QSub, will continue to use its original EIN.

Because the S election from the original corporation carries over, filing a new Form 2553 for the new entity is not required. The new parent corporation must instead timely file Form 8869, Election to Treat a Corporation as a Qualified Subchapter S Subsidiary.