PLR 200020039: Late Section 338(h)(10) election allowed for S corporation purchase

Plain-English summary

A corporation purchased an S corporation from its shareholder for cash and a note. The buyer and seller intended a joint IRC § 338(h)(10) election but did not file a valid Form 8023 by the deadline. The IRS found that they acted reasonably and in good faith, and granted 30 days from the ruling date to file the election. Relief requires both parties to sign and treat the sale consistently, their aggregate tax liability to be no lower than with a timely election, and the shareholder to avoid installment method reporting under § 453. The IRS did not determine whether the purchase actually qualified for § 338(h)(10) treatment or the resulting gain or loss.

Ruling snapshot

• Question: May the purchaser and seller file a late joint § 338(h)(10) election for the S corporation sale?
• Outcome: Approved for 30 days, subject to stated conditions.
• Key authorities: IRC §§ 338(h)(10), 453; Treas. Reg. §§ 1.338(h)(10)-1(d), 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Index Number: 0338.00-00
Washington, DC 20224
9100.06-00
Number: 200020039
Person to Contact:
Release Date: 5/19/2000
Telephone Number:

Refer Reply To:
CC:DOM:CORP:1 PLR-114241-99

Date:
February 18, 2000

Re:

LEGEND

Parent
=

Purchaser =

Target Shareholder =

Target
=

State X
=

Date A
=

Date B
=

Date C
=

Company Official =

Tax Professionals =

Dear

This letter responds to a letter dated July 31, 1999, on behalf of the above taxpayers, requesting an extension of time under § 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations to file an election. Purchaser and Seller are requesting the extension to file a “section 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

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Regulations (the “Election”), with respect to Purchaser's acquisition of the Target stock on Date A. The information submitted for consideration is summarized below.

Parent, a State X corporation, uses the accrual method of accounting and a calendar year. Purchaser, a State X corporation, uses the accrual method of accounting and a calendar year. All the stock in Purchaser was, at the time of the transaction described below, and still is held by Parent.

Target, a State X corporation, is an S corporation that uses the accrual method of accounting and a calendar year. Prior to Date A, all the stock in Target was held by Target Shareholder, part directly and part together with his wife through a grantor trust of which he and his wife are co-trustees.

On Date A, Parent, Purchaser, Target, and Target Shareholder entered into a Stock Purchase Agreement that provided for Purchaser to purchase all the outstanding Target stock from Target Shareholder. Also on Date A, Purchaser acquired all of the stock in Target from Target Shareholder, pursuant to the Stock Purchase Agreement, for cash and a note in a fully taxable transaction. The note constituted less than half of the total consideration. Gain on the sale has not and will not be reported on the installment method and the taxpayers do not intend to use the provisions of § 453 with regard to this sale. Following the acquisition, “new” Target was included in Purchaser’s consolidated return. It is represented that (i) Purchaser was not related to Seller within the meaning of § 338(h)(3), and (ii) Purchaser's acquisition of the stock of Target qualified as a "qualified stock purchase," as defined in § 338(d)(3).

Purchaser and Seller intended to file the Election. The Election was due on Date B. However, for various reasons a valid Election was not filed. On Date C (which is after Date B), or shortly thereafter, Company Official, Tax Professionals and Purchaser’s and/or Target’s authorized representatives discovered that the Election had not been filed. Subsequently, this request was submitted, under § 301.9100-1, for an extension of time to file the Election.

The period of limitations on assessments under § 6501(a) has not expired for Purchaser’s, Seller’s or Target’s taxable year(s) in which the acquisition occurred, the taxable year(s) in which the Election should have been filed, or any taxable year(s) 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: (i) the purchasing corporation makes or is treated as having made a "section 338 election" under § 338(g); and (ii) 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 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

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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 1 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 deemed to sell all of its assets and distribute 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 is 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 or S corporation shareholders), it distributed all of its assets in complete liquidation. If target is an S corporation immediately before the acquisition date, nothing in the § 338 provisions prevents a holder of target stock from taking deemed sale gain into account under §§ 1366 and 1367. See § 331 or 332 for gain or loss recognized by the old target shareholders as a result of the deemed liquidation. Section 1.338(h)(10)-1(e)(2)(ii). No gain or loss is recognized on the sale or exchange by the selling consolidated group (or the selling affiliate or an S corporation shareholder) of target stock included in the QSP. If target is an S corporation immediately before target’s acquisition date, the sale or exchange of old target does not result in a termination of the § 1362(a) election for the S corporation. Section 1.338(h)(10)-1(e)(2)(iv).

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 or the S

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corporation shareholders) 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 or S corporation shareholders) and the selling corporation (or the common parent of the consolidated group of which the selling corporation is a member, or the selling affiliate or S corporation shareholders). The instructions provide that the form must be signed by each person authorized to act on behalf of each corporation, and if made for an S corporation it must be signed by each S corporation shareholder who sells target stock in the “qualified stock purchase.” The instructions further provide that 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

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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, Company Official, Target Shareholder and his wife, and Tax Professionals explain the circumstances that resulted in the failure to timely file a valid Election. The affidavit of the Company Official, the Chief Financial Officer of Parent, states that he was the Company Official responsible and relied on for the election by Purchaser. The Company Official and Purchaser and Seller relied on the Tax Professionals. The affidavit for the Tax Professionals for Purchaser and the affidavit for the Tax Professional for Seller state that Purchaser and Seller relied on them for the election and that they failed to ensure that the election was timely made.

Based on the facts and information submitted, including the representations made, we conclude that Purchaser 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 Purchaser 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) both Purchaser and Seller signing the Election, (ii) both Purchaser and Seller treating the acquisition/sale of the Target stock as a § 338(h)(10) transaction, and (iii) the taxpayers’ (i.e., Purchaser’s and Seller’s) tax liability (if any) being not lower, in the aggregate, for all years to which the Election applies, than it would have been if the Election had been timely made (taking into account the time value of money). In addition, the above extension of time is also conditioned on Target Shareholder not using § 453 (dealing with the installment method) to report the gain on the sale. 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 than it would have been if the Election had been timely made (taking into account the time value of money). Section 301.9100-3(c).

Purchaser 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 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.

Purchaser and Seller must amend their returns to report the transaction as a § 338(h)(10) transaction for the year in which the transaction was consummated, and they must attach to the return a copy of this letter and a copy of the Election (or it they

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already reported the transaction as a § 338(h)(10) transaction, they must merely amend their returns to attach a copy of the election and a copy of this letter).

We express no opinion: (i) as to whether the acquisition/sale of Target’s stock qualifies as a QSP under § 338(d)(3); (ii) as to whether the acquisition/sale of Target’s stock qualifies for § 338(h)(10) treatment; or (iii) 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 Target’s deemed asset sale.

In addition, we express no opinion as to the tax consequences of filing the Election late 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 Election late that are not specifically set forth in the above ruling. For purposes of 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 who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

Pursuant to the powers of attorney on file in this office, a copy of this letter is being sent to your authorized representative.

Sincerely yours,
Assistant Chief Counsel (Corporate)
By: Bernita Thigpen
Deputy Assistant Chief Counsel Counsel
(Corporate)