How to unwind S-Corp that owns shares in another S-Corp

[S&D Associates]

I have a new client who has a S-Corp that has shares in another S-Corp. How can I unwind this situation.

[kathyc2]

I have a new client who has a S-Corp that has shares in another S-Corp. How can I unwind this situation.

How does a S-corp own shares is another S corp? Are you talking about a qualified S subsidiary?

[JON]

Better hope so - qualify sub is the only ownership that could work.

[S&D Associates]

How does a S-corp own shares is another S corp? Are you talking about a qualified S subsidiary?

Unfortunately, the S-Corp was set up incorrectly. It is a S-Corp owning shares in another S-Corp. I'm trying to unwind this terrible situation for the client. Have you any suggestions?

[kathyc2]

Unfortunately, the S-Corp was set up incorrectly. It is a S-Corp owning shares in another S-Corp. I'm trying to unwind this terrible situation for the client. Have you any suggestions?

Technically having a corp as a shareholder invalidates their S election. Was it just an error in the year of start-up or has it been a number of years?

[kathyc2]

Expand on details

The question you posed is very short on details. Expanding on them will help people help you.

Let's call the S that issued stock to the other S company H and the other company R.

Does H have shareholders other than the S?
Does R have 1 individual shareholder or more?
Are both companies corporations that elect S status, or is one or both a LLC electing S status?
Did H issue a K1 to R and did R report it as income?
How many years are involved?
Did both report profit for all years involved?
Has IRS questioned H?

[S&D Associates]

H has shareholders other than R
R has more than 1 shareholder
Both companies elected S Status
H issued K-1 and R reported it as income
At least 5 years
H had mostly lost years. R had income years
No

[kathyc2]

Sounds like the S election became invalid when they accepted a corporate shareholder. With several shareholders involved, I personally wouldn't touch this. If you choose to continue on make sure you are well versed in inadvertent terminations.

https://www.law.cornell.edu/cfr/text/26/1.1362-4