"An explanation between the classification of
organizations for federal and state tax purposes."
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DIVISION OF REVENUE
PROPOSED
INFORMATION MEMORANDUM 98-2 JUNE 8, 1998
SUBJECT: EFFECT OF FEDERAL SMALL BUSINESS JOB PROTECTION ACT
Purpose of Regulation -- The Purpose of this regulation is to
explain the effect of the Small Business Job Protection Act of 1996, Pub. L. No.
104-188, 110 Stat 1755 (the Act), as it relates to Subchapter S corporations, the
relationship between the classification of organizations for federal and state tax
purposes and the procedures for electing entity classification.
The Act amended Subchapter S of the IRC by revising the manner in which
Federal S corporations may organize. The revisions affected among other things, the number
of permissible shareholders, the types of shareholders, affiliations with other
corporations, elections and reelections. In general such revisions are applicable
to the State treatment of S corporations.
Authority to make regulations; general information --
(i) The Director of Revenue is charged with the administration and enforcement of all
state tax laws unless such duties are expressly conferred upon another agency. 30 Del.
C. §563
(ii) Published regulations are made and promulgated pursuant to
authority vested in the Director. 30 Del. C. §563
(iii) As used in published regulations, references to a section (§)
number refer to a section of the Delaware Code. References to a section (§) number
preceded by a "1", as in §1.1900.2, refer to sections of regulations published
by the Division of Revenue of this State.
REGULATION:
§1.1900.2 In general; Classification of organizations for state tax purposes;
election of entity classification.
(a) Meaning of terms -- Any term used in these regulations shall have the same meaning
as when used in a comparable context in the laws and income tax regulations of the
United States referring to federal income taxes, unless a different meaning is clearly
required. Any reference to the laws of the United States or to the Internal Revenue Code
shall mean the Internal Revenue Code of 1986 [26 U.S.C. § 1 et seq.] as amended
and regulations and amendments thereto and other laws of the United States relating to
federal income taxes, as the same may be or become effective, for the taxable year.
(b) Classification of entities -- The classification of entities for
Delaware tax purposes shall be as prescribed for federal tax purposes. Unless inconsistent
with Delaware law, the provisions of Sections 1361 through 1379 of the Regulations to the
Internal Revenue Code of 1986 are hereby adopted for Delaware purposes.
(c) Section l36l(b)(3)(B) defines the term "qualified subchapter S
subsidiary" (QSSS) as a domestic corporation that is not an ineligible corporation
if; (1) an S corporation holds 100 percent of the stock of the corporation, and (2) that S
corporation elects to treat the subsidiary as a QSSS. Section 1361(b)(3)(A) provides that
a corporation that is a QSSS is not treated as a separate corporation, and all assets,
liabilities, and items of income, deduction, and credit of the QSSS are treated as assets,
liabilities, and items of income, deduction, and credit of the parent S corporation.
(d) Notice of election to be classified as a QSSS -- A valid election
under the rules prescribed by the Internal Revenue Service by a parent S corporation to
treat a wholly owned subsidiary as a QSSS shall be valid for State purposes upon making
the federal election.
(e) Tax return requirements -- Entities carrying on a trade or business
within this State are subject to the provisions of Title 30 of the Delaware Code and are
required to file income tax returns for such years. An S corporation which has elected to
treat a subsidiary which is conducting business in this State as a QSSS shall be a taxable
entity in this State and the items of income, deductions and apportionment factors of the
QSSS shall be included on the income tax return of the S corporation.
(f) Notwithstanding subsection (e), a QSSS is subject to the licensing
and gross receipts provisions of Title 30 of the Delaware Code with respect to its
business activities conducted within the State.
(g) Effective date of this regulation -- This regulation is effective
as of January 1, 1997.
(Reprinted with permission of Delaware
Division of Revenue) |
