PLR 200003028: Extension granted to file a joint section 338(h)(10) election

Plain-English summary

A purchaser acquired all the stock of a target corporation, but the parties missed the deadline for a joint § 338(h)(10) election. The IRS found that they acted reasonably and in good faith and that an extension would not prejudice the government. It granted the purchaser's parent and the seller 30 days from the letter to file the election. The relief required both parties to sign the election, report the transaction consistently, amend their returns, and meet a condition preventing an aggregate tax reduction compared with a timely election. The IRS did not decide whether the stock acquisition qualified for § 338(h)(10) treatment or determine the resulting gain or loss.

Ruling snapshot

• Question: Could the parties file their joint § 338(h)(10) election after its deadline?
• Outcome: Approved, with a 30-day extension and stated filing, reporting, and tax liability conditions.
• Key authorities: IRC § 338(h)(10); Treas. Reg. §§ 1.338(h)(10)-1(d) and 301.9100-1 through 301.9100-3.

Full text (IRS public release)

Internal Revenue Service            Department of the Treasury

Index Number: 338.01-02             Washington, DC 20224
             9100.07-00
Number: 200003028                   Person to Contact:
Release Date: 1/21/2000             Telephone Number:

                                    Refer Reply To:
                                    CC:DOM:CORP:1–PLR-111418-99
                                    Date:
                                    October 21, 1999




Parent                          =


Purchaser                       =


Seller                          =


Target                          =


State X                         =

State Y                         =

Business A                      =

Business B                      =

Purchaser’s Company Officials   =




Target’s Company Official       =


Tax Preparer                    =

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Date 1                             =

Date 2                             =

Date 3                             =

Dear               :

        We respond to your letter dated June 23, 1999, in which you requested, on
behalf of Parent and Seller, an extension of time under § 301.9100-1 and § 301.9100-3
of the Procedure and Administration Regulations to file a late election. Parent (as the
common parent of the consolidated group that includes Purchaser) and Seller are
requesting an extension to file a § 338(h)(10) election under §§ 338(g) and 338(h)(10)
of the Internal Revenue Code and § 1.338(h)(10)-1(d) of the Income Tax Regulations
with respect to Purchaser’s acquisition of the Target stock on Date 1 (the “Election”).
The information submitted for our review is summarized below.

       Purchaser, a State X corporation, is engaged in both Business A and Business
B. Purchaser files its returns on a consolidated basis with its parent, Parent. Target, a
State Y corporation, also joins in the consolidated returns of its parent, Seller. Target is
engaged in Business A.

       For business reasons, on Date 1 Purchaser acquired all of the issued and
outstanding stock of Target for cash. The stock purchase agreement provided that at
Purchaser’s option, Seller would join with Purchaser in making an election under
§ 338(h)(10) with respect to the purchase of Target. The Election was due on Date 2.
The stock purchase agreement, however, did not indicate the due date for the Election
and Purchaser failed to make the Election. In addition, Purchaser’s Chief Financial
Officer who had extensive knowledge of the stock purchase agreement abruptly left the
company. The missed Election was discovered on Date 3.

       Purchaser has represented that the acquisition of Target constituted a qualified
stock purchase within the meaning of § 338(d)(3), and that Purchaser was not related
to Target within the meaning of § 338(h)(3). The period of limitations on assessments
under § 6501(a) has not expired for Parent’s (and its related entities’), Target's, or any
of the Seller’s taxable year(s) in which the acquisition occurred, the taxable years in
which the Election should have been filed, or any taxable years that would have been
affected by the Election had it been timely filed.

       Section 338(a) permits certain stock purchases to be treated as asset
acquisitions if: (1) the purchasing corporation makes or is treated as having made a
"section 338 election" under § 338(g); and (2) the acquisition is a qualified stock
purchase (“QSP”). Section 1.338-1(c)(10) provides that a “section 338 election” is an
election to apply section 338(a) to Target. Section 338(g) specifies the requirements

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for making a “section 338 election.” Section 1.338(h)(10)-1(d)(3) provides that if a
§ 338(h)(10) election is made for Target, a “section 338 election” is deemed made for
Target. Section 338(d)(3) defines a QSP as any transaction or series of transactions in
which stock (meeting the requirements of § 1504(a)(2)) of a corporation is acquired by
another corporation by purchase during the 12 month acquisition period.

       Section 338(h)(3)(A) provides that the term "purchase" means any acquisition of
stock, but only if: (i) the basis of the stock in the hands of the purchasing corporation is
not determined (I) in whole or in part by reference to the adjusted basis of such stock in
the hands of the person from whom acquired, or (II) under § 1014(a) (relating to
property acquired from a decedent); (ii) the stock is not acquired in an exchange to
which § 351, 354, 355, or 356 applies and is not acquired in any other transaction
described in regulations in which the transferor does not recognize the entire amount of
the gain or loss realized on the transaction; and (iii) the stock is not acquired from a
person the ownership of whose stock would, under § 318(a) (other than paragraph (4)
thereof), be attributed to the person acquiring such stock.

        Section 338(h)(10) permits the purchasing and selling corporations to jointly elect
to treat the target corporation as selling all of its assets and distributing the proceeds in
complete liquidation. The sale of stock included in the QSP is generally ignored. A
§ 338(h)(10) election may be made for Target only if it is a member of a selling
consolidated group, a member of a selling affiliated group filing separate returns, or an
S corporation. Section 1.338(h)(10)-1(a). Gain or loss on the deemed sale is included
in the consolidated return of the selling group (unless the target corporation is a
member of a selling affiliated group filing separate returns or an S corporation). Section
1.338(h)(10)-1(d) provides that a § 338(h)(10) election may be made for the target
corporation if the purchasing corporation makes a QSP of the target corporation stock.
Sections 1.338(h)(10)-1(d)(2) and (3) provide that if a § 338(h)(10) election is made for
the target corporation, it is irrevocable and a § 338 election is deemed made for the
target corporation. More specifically, Target is treated as if, while a member of the
selling group (or owned by the selling affiliate), it distributed all of its assets in complete
liquidation.

         Section 1.338(h)(10)-1(d)(2) provides that a § 338(h)(10) election is jointly made
by a purchaser and the selling consolidated group (or the selling affiliate) on Form 8023
in accordance with the instructions to the form. The regulations further provide that the
election must be made not later than the 15th day of the ninth month beginning after
the month in which the acquisition date occurs. The instructions to Form 8023 provide
that a § 338(h)(10) election must be made jointly by the purchasing corporation (or the
common parent of the consolidated group of which the purchasing corporation is a
member, or the selling affiliate) and the selling corporation (or the common parent of
the consolidated group of which the selling corporation is a member, or the selling
affiliate). The instructions provide that the form must be signed by each person
authorized to act on behalf of each corporation. The instructions further provide that

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the signatures, dates and titles (if applicable) of those persons must be provided in a
"signature attachment," and they provide specific details as to the preparation of the
"signature attachment" and its attachment to Form 8023.

         Section 1.1502-77(a) provides that the common parent, for all purposes (other
than for several purposes not relevant here), shall be the sole agent for each subsidiary
in the group, duly authorized to act in its own name in all matters relating to the tax
liability of the consolidated return year. See also Form 8023 and the instructions
thereto.

       Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable
extension of time to make a regulatory election, or a statutory election (but no more
than six months except in the case of a taxpayer who is abroad), under all subtitles of
the Internal Revenue Code except subtitles E, G, H and I, provided the taxpayer
demonstrates to the satisfaction of the Commissioner that:

      (1) The taxpayer acted reasonably and in good faith, and,
      (2) Granting relief will not prejudice the interests of the government.

       Section 301.9100-1(b) defines the term "regulatory election" as including an
election whose due date is prescribed by a regulation, revenue ruling, revenue
procedure, notice, or announcement. Sections 301.9100-1 through 301.9100-3
provide the standards the Commissioner will use to determine whether to grant an
extension of time to make a regulatory election. Section 301.9100-1(a). Section
301.9100-2 provides automatic extensions of time for making certain elections.
Requests for relief under § 301.9100-3 will be granted when the taxpayer provides
evidence to establish that the taxpayer acted reasonably and in good faith, and that
granting relief will not prejudice the interests of the government. Section 301.9100- 3(a).

       In this case, the time for filing the Election is fixed by the regulations (i.e.,
§ 1.338(h)(10)-1(d)). Therefore, the Commissioner has discretionary authority under
§ 301.9100-1 to grant an extension of time for Purchaser and Seller to file the Election,
provided Purchaser and Seller show they acted reasonably and in good faith, the
requirements of §§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief will not
prejudice the interests of the government.

       Information, affidavits, and representations submitted by Purchaser, Seller,
Target’s and Purchaser’s Company Officials and Purchaser’s Tax Preparer, explain the
circumstances that resulted in the failure to timely file the Election. The information
establishes that relief was requested under § 301.9100-3 before the failure to make the
Election was discovered by the Service, and that no reporting position was taken by any
affected party that did not conform with the Election. See § 301.9100-3(b)(1). Also, the
information establishes that tax professionals were responsible for the Election, that
Parent and Seller relied on them to timely make the Election, and that the government

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will not be prejudiced if relief is granted. See §§ 301.9100-3(a) and 301.9100-
3(b)(1)(v).

       Based on the facts and information submitted, including the representations
made, we conclude that Parent and Seller have shown they acted reasonably and in
good faith, the requirements of §§ 301.9100-1 and 301.9100-3 are satisfied, and
granting relief will not prejudice the interests of the government. Accordingly, an
extension of time is granted under § 301.9100-1, until 30 days from the date of
issuance of this letter, for Parent (as the common parent of the consolidated group that
includes Purchaser, the deemed acquiring corporation) and Seller to file the Election
with respect to the acquisition of Target, as described above.

        The above extension of time is conditioned on: (i) Parent and Seller signing the
Election, (ii) Parent and Seller treating the acquisition/sale of the Target stock as a
§ 338(h)(10) transaction, and (iii) the taxpayers’ (i.e., Seller’s and Parent’s tax liability
(if any) being not lower, in the aggregate, for all years to which the Election apply, than
it would have been if the Election had been timely made (taking into account the time
value of money). No opinion is expressed as to the taxpayers’ tax liability for the years
involved. A determination thereof will be made by the District Director’s office upon
audit of the Federal income tax returns involved. Further, no opinion is expressed as to
the Federal income tax effect, if any, if it is determined that the taxpayers’ liability is
lower. Section 301.9100-3(c).

        Parent and Seller must file the Election in accordance with § 1.338(h)(10)-1(d).
That is, a new Election on Form 8023, must be executed on or after the date of this
letter, which grants an extension, and must be filed in accordance with the instructions
to the form. See Announcement 98 -2, 1998 -2 I.R.B. 38. A copy of this letter should
be attached to the election form.

       Parent and Seller must amend their returns to report the transaction as a
§ 338(h)(10) transaction for the year in with the transaction was consummated, and to
attach to their returns a copy of this letter and a copy of the Election (along with the
information required with the election form).

        We express no opinion as to: (1) whether the acquisition/sale of Target’s stock
qualifies as a QSP under § 338(d)(3); (2) whether the acquisition/sale of Target’s stock
qualifies for § 338(h)(10) treatment; or (3) if § 338(h)(10) is applicable, as to the amount
and character of gain or loss, if any, recognized by Target (and, thus, by Seller) on the
Target’s deemed asset sale.

       In addition, we express no opinion as to the tax consequences of filing the late
election under the provisions of any other section of the Code and regulations, or as to
the tax treatment of any conditions existing at the time of, or resulting from, filing the
late Election that are not specifically set forth in the above ruling. For purposes of

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granting relief under § 301.9100-1, we relied on certain statements and representations
made by the taxpayers. However, the District Director (s) should verify all essential
facts. In addition, notwithstanding that an extension is granted under § 301.9100-1 to
file the Election, penalties and interest that would otherwise be applicable, if any,
continue to apply.

      This letter is directed only to the taxpayer(s) who requested it. Section
6110(k)(3) provides that it may not be used or cited as precedent.

       Pursuant to a power of attorney on file in this office, a copy of this letter is being
sent to the taxpayer that requested this ruling.



                                           Sincerely yours,


                                           Assistant Chief Counsel (Corporate)


                                           BY:____________________
                                           Bernita L. Thigpen
                                           Deputy Assistant Chief Counsel
                                           (Corporate)