Technical Advice Memorandum CTAM 97- 13

Subject: Qualified Subchapter S Subsidiaries
Schedule: Corporate Income and Franchise Tax
Issued By: Corporate, Excise, and Insurance Tax Division
Date: August 1, 1997
Reference: CTAM 97- 13

Beginning with tax years that start after 1996, the Federal Small Business Job Protection Act of 1996 allows S-Corporations to own qualified S corporation subsidiaries, (QSSS). The parent must elect qualified S corporation treatment for its 100% owned subsidiary. For federal tax purposes, a QSSS is not treated as a separate corporation. Rather all the subsidiary's assets, liabilities, and items of income, deductions, and credits are treated as those of the S-Corporation parent. I.R.C. § 1361(b)(3)(A).

House Bill 59 (S.L. 1997-55) has amended G.S. 105-228.90(b)(1a) to update the Internal Revenue Code reference to the Code as enacted as of January 1 1997. The January 1, 1997 Code includes the QSSS provisions. Therefore, North Carolina will follow the federal treatment for income tax purposes and recognize all the income and expense items as belonging to the parent corporation.

When the parent makes the election, the subsidiary is deemed to be liquidated under I.R.C. §§ 332 and 337 immediately before the election is effective. The corporation must file a return for the short period ending on the date it goes out of existence.

Parent S-Corp Nexus

All of the subsidiary's activities will be attributed to the parent for purposes of determining whether the parent is doing business in North Carolina.

Apportionment Factors

The S-Corporation must aggregate and include the subsidiary's items of income, loss, and deductions before determining the parent's apportionable or allocable income. The S-Corporation parent must also include the subsidiary's property, payroll, and sales in determining the parent's apportionment factors.

Franchise Tax Returns

Pursuant to G.S. 105-122, each for-profit corporation, incorporated, domesticated, or doing business in this State, is required to file a franchise tax return. Accordingly, each QSSS doing business in this State and each parent S-Corporation doing business in this State must file a separate franchise tax return for each taxable period based on their own separate attributes. The assets, liabilities, income, deductions losses or credits of the parent and the qualified S-Corporation are not combined for this purpose. A franchise tax return must be filed even if the resulting liability is the minimum franchise tax.


Shareholders in an S-Corporation parent with a QSSS doing business in this State must report income attributable to this State in accordance with Division I-S of Article 4 of Chapter 105 of the General Statutes.