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In general, a QSub is not treated as a separate corporation for federal tax purposes. 17 All of the
QSub's assets, liabilities, and items of income, deduction, and credit are treated as assets,
liabilities, and items of income, deduction, and credit of the Subchapter S corporation parent. 18
As discussed below, however, there are certain regulatory exceptions to the general rule that a
QSub is not treated as a separate corporation for federal tax purposes.

Qualified REIT Subsidiary Rules.

A qualified real estate investment trust subsidiary (QRS) is a relatively specialized form of
disregarded entity. A real estate investment trust (REIT) is an electing domestic corporation (or
trust or other association taxable as a corporation) that meets various organizational
requirements, derives most of its income from passive real property sources, distributes most of
its income to its owners, and holds mainly real estate. 19 REITs generally receive conduit income
tax treatment for income distributed to their owners. 20

A QRS is a corporation (or trust or other association taxable as a corporation) which is wholly
owned by a REIT and does not elect with its owner to be treated as a taxable REIT subsidiary. 21
A QRS is not treated as a separate corporation, and, like a QSub, its assets, liabilities, and items
of income, deductions, and credit are treated as those of the REIT owner. 22 Thus, the corporate
status of a QRS is generally ignored for federal tax purposes. As with QSubs, however, there are
certain regulatory exceptions to the general rule that a QRS is disregarded for federal tax
purposes.

General Exceptions and Modifications

The number of exceptions and modifications to the general rule that DREs are treated as "tax
nothings" has quietly increased over the last decade. A survey of some of the more prevalent
exceptions and modifications to the general rule follows.

Employment and Excise Taxes.

Shortly after the check-the-box regulations and the QSub rules were issued in the late 1990s,
the IRS issued Notice 99-6. 23 This Notice announced the IRS's intention to issue guidance on the
proper method for DREs to report employment taxes. It also sought public comment on the
issue. Notice 99-6 set forth two methods for reporting and paying employment tax for DREs until
the IRS issued its guidance. The temporary guidance said that the IRS would accept reporting
and payment of employment taxes with respect to SMLLC or QSub employees if either of the
following occurred:

(1) The owner calculated, reported, and paid all employment tax obligations with respect
to the DRE's employees under its own name and taxpayer identification number.
(2) The DRE separately calculated, reported, and paid all employment tax obligations
with respect to its employees under the owner's own name and taxpayer identification
number. 24

Despite allowing a DRE to separately calculate, report, and pay employment tax obligations with
respect to its employees, Notice 99-6 said that the owner would, nonetheless, retain ultimate
responsibility for the employment tax obligations incurred with respect to the DRE's employees.

After almost six years, the IRS issued proposed regulations governing the treatment of DREs for
employment tax and related reporting purposes. 25 In August 2007, the IRS finalized the
proposed regulations with a few minor modifications. 26 Reg. 301.7701-2(c)(2)(iv) treats eligible

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