Sub S bought by other Sub S

[John3cpa]

My client, a Sub S, bought 100% of the stock from the sole owner of another Sub S in the same business. I think what happens is that the purchased Sub S files a "final" return showing a change in ownership on the now 2 K1's with pro rata ownership % for parts of year before and after the change. My client then "consolidates" the purchased company into his 1120S. Am i correct in this? And...is there any form to include in my clients 1120S to indicate the "consolidation".

[Roland Slugg]

Well, if that's all that transpired, then the shareholder now owns an S Corp which, in turn, owns all the shares of another S Corp. That does not violate the eligibility rules for S Corps. (Code §1361(b))

You don't file a final return or merge the acquired S Corp's assets in with the parent S Corp unless and until affirmative steps are taken to accomplish a liquidation of the acquired S Corp and its consolidation into the other.