PLR 200029041: Foreign subsidiary stock purchase receives late election relief

Plain-English summary

A foreign corporation bought all the shares of another foreign corporation, but its U.S. shareholder failed to file a planned section 338(g) election on time. The IRS found reasonable conduct and good faith, and granted the shareholder 30 days from the letter date to file a new election. Relief depended on the affected taxpayers' aggregate U.S. tax liability being no lower than if the election had been timely filed, taking account of the time value of money. The letter also required election filings and related returns or amendments. The IRS did not decide whether the purchase qualified for section 338 treatment or determine gain or loss from a deemed asset sale.

Ruling snapshot

• Question: May the U.S. shareholder file a late section 338(g) election for the foreign stock purchase?
• Outcome: Approved, subject to the stated filing and tax-liability conditions.
• Key authorities: IRC § 338(g); Treas. Reg. §§ 1.338-1 and 301.9100-1 through 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: 200029041          Person to Contact:
Release Date: 7/21/2000
                           Telephone Number:

                           Refer Reply To:
                           CC:DOM:CORP:5 PLR-104929-00


                           Date:
                           April 20, 2000




Legend

Partnership       =



Partner A         =



Partner B         =



Purchaser         =


Foreign Sub       =


Seller            =

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Company Officials
& Tax Professionals =

Authorized
Representative        =

Date Y                =

Date A                =

Date B                =

Date C                =

State A               =

Country X             =




Dear              :

       This letter responds to your letter dated March 14, 2000, on behalf of the above
taxpayers, requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations to file an election. The extension is being
requested for Partner A (as the United States shareholder of Purchaser, the foreign
purchasing corporation) to file an election under § 338(g) of the Internal Revenue Code
and §§ 1.338-1(d) and 1.338-1(g) of the Income Tax Regulations with respect to
Purchaser’s acquisition of the stock of Foreign Sub (sometimes hereinafter referred to
as the "Election") on Date A. All citations in this letter to regulations under § 338 are to
the regulations in effect for the date of the qualified stock purchase described herein.
This letter relies on information contained in letters dated September 9, October 18,
1999, and February 15, 17, 18, and 22, 2000, associated with PLR-115307-99, issued
February 29, 2000. The material information submitted for consideration is summarized
below.

       Partner A and Partner B, S corporations and State A corporations, were partners
in Partnership on Date A. On Date Y (a date subsequent to Date A), Partner B merged
into Partner A in a transaction represented to qualify as a tax-free reorganization under
§ 368(a)(1)(A), terminating Partnership. On Date A through Date Y, Partnership owned

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all of the outstanding stock of Purchaser.

       Purchaser, a Country X corporation, acquired for cash, on Date A, in a fully
taxable transaction, 100% of the stock of Foreign Sub, a Country X corporation, from
Seller who was domiciled outside of the United States and who is not a United States
shareholder, as defined in § 951(b). Foreign Sub does not have any subsidiaries.

       Prior to the acquisition, Seller did not file United States income tax returns and
was not subject to United States income tax. Further, Foreign Sub was not: (1) a
controlled foreign corporation within the meaning of § 957(a) (a “CFC”); (2) a passive
foreign investment company for which an election under § 1295 was in effect; (3) a
foreign investment company or a foreign corporation the stock ownership of which is
described in § 552(a)(2); or (4) required, under § 1.6012-2(g), to file a United States
income tax return.

        On Date A, Purchaser acquired from Seller, for cash in a fully taxable acquisition,
100% of the stock of Foreign Sub. It is represented that the acquisition of Foreign Sub
constituted a qualified stock purchase within the meaning of § 338(d)(3), and that
Purchaser was not related to Seller within the meaning of § 338(h)(3). The period of
limitations on assessments under § 6501(a) has not expired for Partner A’s, Partner
B’s, Purchaser’s, or Foreign Sub’s taxable year 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.

        The Election was due on Date B. However, for various reasons the Election was
not filed. On Date C (which is after the due date for the Election), Company Officials &
Tax Professionals and Authorized Representative 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.

        Section 338(a) permits certain stock purchases to be treated as asset purchases
if the purchasing corporation makes or is treated as having made a "section 338
election" under § 338(g) and the acquisition is a "qualified stock purchase." Section
338(d)(3) defines a "qualified stock purchase" as any transaction or series of
transactions in which stock (meeting the requirements of § 1504(a)(2)) of one
corporation is acquired by another corporation by purchase during the 12 month
acquisition period.

         Sections 1.338-1(g)(1)(i) and (v) provide, inter alia, that a foreign purchasing
corporation or deemed foreign purchasing corporation is not eligible for the special rule
under § 1.338-1(g)(1) (i.e., which specifies a filing date for the election that is later than
the filing date required by § 338(g) and § 1.338-1(d)) if such foreign corporation is
considered subject to United States tax (e.g., is a CFC or is required to file a United
States income tax return). Section 338(h)(3)(A)(iii) provides that the term "purchase"

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means any acquisition of stock, but only if (1) the basis of the stock in the hands of the
purchasing corporation is not determined in whole or in part by reference to the
adjusted basis of such stock in the hands of the person from whom acquired, or under
§ 1014(a) (relating to property acquired from a decedent); (2) 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 (3) the stock is not
acquired from a person the ownership of whose stock would, under § 318(a), be
attributed to the person acquiring such stock.

       Section 1.338-1(d) provides that a purchasing corporation makes a "section 338
election" for target by filing a statement of "section 338 election" on Form 8023 in
accordance with the instructions on the form. The "section 338 election" must be filed
not later than the 15th day of the ninth month beginning after the month in which the
acquisition date occurs. A "section 338 election" is irrevocable.

       Section 1.338-1(g)(3) provides that the United States shareholders (as defined in
§ 951(b)) of a foreign purchasing corporation that is a controlled foreign corporation (as
defined in § 957, taking into account § 953(c)) may file a statement of "section 338
election" on behalf of the purchasing corporation if the purchasing corporation is not
required under § 1.6012-2(g) (other than § 1.6012-2(g)(2)(i)(b)(2)) to file a United States
income tax return for its taxable year that includes the acquisition date. Form 8023
must be filed as described in the form and its instructions, and also must be attached to
Form 5471 (Information Return with Respect to Foreign Corporation) filed with respect
to the purchasing corporation by each United States shareholder for the purchasing
corporation.

       Section 1.338-2(b)(4) provides that if an election under § 338 is made for target,
old target is deemed to sell target’s assets and new target is deemed to acquire those
assets.

       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.

       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. Section
301.9100-3 provides extensions of time for making regulatory elections that do not
meet the requirements of § 301.9100-2. Requests for relief under § 301.9100-3 will be

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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 was fixed by the regulations (i.e.,
§ 1.338-1(d)). Therefore, the Commissioner has discretionary authority under
§ 301.9100-1 to grant an extension of time for Partner A to file the Election, provided
Partner A shows it 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 Company Officials &
Tax Professionals and Authorized Representative explain the circumstances that
resulted in the failure to file the Election. The information establishes that Company
Officials & Tax Professionals were responsible for the Election, that Partner A relied on
Company Officials & Tax Professionals to timely make the Election, and that the
government will not be prejudiced if relief is granted. See § 301.9100-3(b)(1)(v).

        Based on the facts and information submitted, including the representations that
have been made, we conclude that Partner A acted reasonably and in good faith in
failing to timely file the Election, the requirements of §§ 301.9100-1 and 301.9100-3 are
satisfied, and granting relief will not prejudice the interests of the government.
Accordingly, we grant an extension of time under § 301.9100-1, until 30 days from the
date of issuance of this letter, for Partner A to file the Election with respect to the
acquisition of the stock of Foreign Sub, as described above.

       The above extension of time is conditioned on the taxpayers' (Partner A’s,
Partner B’s, Purchaser’s, Foreign Sub’s and Seller’s (to the extent they have any United
States tax liability)) tax liability 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). 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).

        Partner A should file the Election in accordance with §§ 1.338-1(d) and 1.338-
1(g). 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 on
the election form (together with any information that is required to be attached to the
election form). A copy of this letter should be attached to the election form. Partner A,
Partner B and/or Partnership, as applicable, must file or amend, as applicable, their
returns reporting the acquisition/sale as a "section 338 transaction,” and attach thereto
a copy of this letter and a copy of the election form (also see §§ 1.338-1(g) and 1.338-

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5). That is, "old" Foreign Sub must file a separate final return (if and as applicable) and
"new" Foreign Sub must be included, as applicable, in Partner A’s, Partner B’s, and/or
Partnership’s return (by being listed on Form 5471) for the years following the
acquisition. See §§ 1.338-1(e) and 1.338-1(g), and Announcement 98-2, 1998-1 C.B.

282. Further, the notice requirements of § 1.338-1(g)(4), if applicable, must be
satisfied.

      No opinion is expressed as to: (1) whether the acquisition of the stock of Foreign
Sub qualifies as "qualified stock purchase"; (2) whether the acquisition of the stock of
Foreign Sub qualifies for § 338(a) treatment; or (3), if the acquisition of the stock of
Foreign Sub qualifies for § 338(a) treatment, as to the amount of gain or loss
recognized (if any) by Foreign Sub on the deemed asset sale.

         In addition, no opinion is expressed as to the tax effects or 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 tax
effects or consequences 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 taxpayer, its employees
and representatives. However, the District Director 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.


                                          Sincerely yours,




                                          Philip J. Levine
                                          Assistant Chief Counsel (Corporate)