Liquidating qsss qsub
During this transitional period, therefore, the liquidation of Y will be respected as a step independent from the stock acquisition by X.
In order to avoid this possibly unfavorable result, the Service has provided transitional relief, under which the step transaction doctrine will not apply in the case of an S corporation that acquires some or all of the stock of a corporation, and then makes a QSub election for the related corporation.
The transitional period mitigates this unexpected result.
Further, the Service has indicated that it intends to promulgate new substantive regulations, applicable to all corporations, to eliminate this often unexpected result.
Consider a case in which individual A owns 50% of the stock of Y and A's corporation, X, owns the other 50% interest in Y.
Under the step transaction doctrine, A's contribution of his 50% interest in Y to X, followed by X's QSub election for Y, would be a taxable transaction.