PLR 200033024: a 30 day extension permits a section 338(g) election for Target 4

Plain-English summary

A foreign purchasing company acquired all of the stock of five foreign target corporations, and the common parent of its consolidated group intended to make section 338(g) elections for those acquisitions. The election for Target 4 was not filed by the deadline because the parent relied on an outside tax professional, and the IRS found that the taxpayers acted reasonably and in good faith without prejudicing the government. It granted the parent an extension until 30 days after the letter to file the Target 4 election, provided that an election had been made for Target 2 and that the taxpayers followed the filing and amended return instructions. The letter gave no opinion on whether the Target 4 acquisition was a qualified stock purchase, qualified for section 338(a) treatment, or produced gain or loss on the deemed asset sale.

Ruling snapshot

• Question: May the common parent receive additional time to file a late section 338(g) election for Target 4 after relying on a tax professional?
• Outcome: Approved, conditionally. An extension until 30 days from the letter was granted, subject to the Target 2 election, the section 301.9100 requirements, and the condition that aggregate tax liability not be lower than it would have been after a timely election.
• Key authorities: IRC §§ 338, 338(a), 338(g), 338(d)(3), 338(h)(3), 338(h)(6), 318(a), 6501, 957, 1295, 552(a), and 6012(g); Treas. Reg. §§ 1.338-1(c)(10), 1.338-1(c)(14), 1.338-1(d), 1.338-1(e), 1.338-1(g), 1.338-2(b)(4), and 301.9100-1 through 301.9100-3.

Full text (IRS public release)

Internal Revenue Service               Department of the Treasury

Index Number: 0338.01-02, 9100.06-00   Washington, DC 20224



                                       Person to Contact:
Number: 200033024                      Telephone Number:
Release Date: 8/18/2000
                                       Refer Reply To:
                                       CC:DOM:CORP:3 - PLR-105786-00
                                       Date:
                                       May 18, 2000



Re:

Parent            =


Target 1          =

Target 2          =

Target 3          =

Target 4          =

Target 5          =

Sub X             =


Sub Y             =


Purchaser         =

Seller 1          =

Seller 2          =

Seller 3          =

Seller 4          =

a                 =

b                 =
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c                 =

d                 =

e                 =

f                 =

g                 =

h                 =

i                 =

j                 =

k                 =

L                 =

m                 =

n                 =

q                 =

State A           =

Country B         =

Date A            =

Date B            =

Date C            =

Parent Official   =

Outside CPA/
Authorized
Representative    =
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        This responds to a letter dated February 4, 2000, submitted on your behalf by
your authorized representative, requesting an extension of time under §§ 301.9100-1
through 301.9100-3 of the Procedure and Administration Regulations to file an election.
Parent (as common parent of the consolidated group of which Sub Y, the United States
shareholder of Purchaser, the foreign purchasing company, is a member) is requesting
an extension of time to file an election under § 338(g) of the Internal Revenue Code
with respect to the acquisition of Target 4 (hereinafter referred to as the “Election"). All
citations in this letter to regulations under § 338 are to the regulations as in effect for
Date A. Additional information was submitted in letters dated May 10 and May 15,
2000. The material information submitted for consideration is summarized below.

       Sub X, a State A corporation, is a first-tier, wholly owned subsidiary of Parent, a
State A corporation. Parent was (and is) the common parent of a consolidated group.

       Sub X owns 100 percent of outstanding stock of Sub Y, a State A corporation.
Sub Y owns 100 percent of the outstanding stock of Purchaser, which is incorporated
under the laws of Country B.

        Target 1, Target 2, Target 3, Target 4, and Target 5 (hereinafter, collectively
referred to as the “Targets”) are corporations formed under the laws of Country B. Prior
to their acquisition by Purchaser, all of the outstanding stock of the Targets were owned
as follows: Target 2 had a shares of stock outstanding, of which Seller 1 owned b
shares, Seller 2 owned c shares and Seller 3 owned the remaining d shares; Target 1
had e shares outstanding, of which Target 2 owned f shares and Seller 4 owned the
remaining g shares; Target 3 had h shares outstanding, of which Target 1 owned i
shares, Target 2 owned j shares, Seller 2 owned k shares, Seller 3 owned L shares,
and Seller 4 owned the remaining m shares; Target 4 had n shares outstanding, of
which Seller 2 owned L shares and Target 2 owned the remaining q shares; and Target
5 was wholly owned by Target 1.

       At the time of the acquisition, none of the Targets were (1) controlled foreign
corporations within the meaning of § 957(a); (2) passive foreign investment companies
for which an election under § 1295 was in effect; (3) foreign investment companies or
foreign corporations the stock ownership of which is described in § 552(a); or (4)
required under § 1.6012-2(g) to file a United States income tax return.

        On Date A, in a single transaction, Purchaser acquired all of the stock of the
Targets owned by Sellers 1 - 4. Thus, after the purchase, Purchaser owned, directly or
through Targets 1 and 2, all of the stock of Targets 1 - 5. Prior to making the purchase,
Parent determined that it would file elections pursuant to the provisions of § 338(g) to
treat the acquisition of the stock of each of the Targets as the purchase of the assets of
each of the Targets.
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        It has been represented that (1) the stock of the Targets was acquired for cash in
a fully taxable transaction; (2) neither Parent nor any members of the Parent affiliated
group was related to the Targets’ shareholders within the meaning of § 338(h)(3); and
(3) the acquisition of the stock of each of the Targets by Purchaser was a "qualified
stock purchase" within the meaning of § 338(d)(3).

        The Election was due on Date B. Parent relied on Outside CPA/Authorized
Representative to make the Election. However, for various reasons the Election was
not filed on the applicable due date. On Date C (which is after Date B and, thus, after
the due date for the Election), Outside CPA/Authorized Representative discovered that
the Election was not timely filed. Subsequently, this request was submitted, under
§ 301.9100-1(a) , for an extension of time to file the Election. The statute of limitations
under § 6501 has not run for the tax year in which the acquisition occurred, the taxable
year in which the Election should have been filed, or for 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
“§ 338 election” under § 338(g); and (2) the acquisition is a “qualified stock purchase.”
Section 1.338-1(c)(10) provides that a “§ 338 election" is an election to apply § 338(g)
to target.

       Section 338(g) specifies the requirements for making a “§ 338 election.” 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 1 corporation
is acquired by another corporation by purchase during the 12-month acquisition period.

       Sections 1.338-1(g)(1)(i) and (v) provide that for purposes of § 1.338-1(g)(1) (i.e.,
qualifying for the special rule which provides a later filing date for an election under
§ 338(g) than ordinarily required), a foreign corporation is considered subject to United
States tax (i.e., is not eligible for the special rule) if it is a controlled foreign corporation.

       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.
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       Section 1.338-1(d) provides that a purchasing corporation makes a "§ 338
election" for target by filing a statement of "§ 338 election" on Form 8023 in accordance
with the instructions on the form. The "§ 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 "§ 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 "§ 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 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.

       Section 1.338-2(b)(4)(ii), Example 1, illustrates how the purchase of a
corporation holding target stock (provided a § 338(g) election is made therefor) and the
direct purchase of the remaining target stock can be combined to make a qualified
stock purchase.

       The term target affiliate has the same meaning as in § 338(h)(6) (applied without
§ 338(h)(6)(B)(i)). Thus, a corporation described in § 338(h)(6)(B)(i) is considered a
target affiliate for all purposes of § 338. If a target affiliate is acquired in a qualified
stock purchase, it is also a target. See § 1.338-1(c)(14). 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 § 338(h)(3)(B), new target’s deemed purchase of stock
of another corporation is a purchase for purposes of § 338(d)(3) on the acquisition date
of target. If new target’s deemed purchase causes a qualified stock purchase of the
other corporation and if a § 338 election is made for the other corporation, the
acquisition date for the other corporation is the same as the acquisition date of target.
However, the deemed sale and purchase of the other corporation’s assets is
considered to take place after the deemed sale and purchase of target’s assets. See
§ 1.338-2(b)(4).

         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 for the consolidated return year. See also Form 8023 and the instructions
thereto.
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       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 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.,
§ 1.338-1(d)). Therefore, the Commissioner has discretionary authority under
§ 301.9100-1 to grant an extension of time for Parent (as the common parent of the
consolidated group that includes Sub Y, the United States shareholder of the foreign
purchasing corporation) to file the Election, provided Parent shows that Sub Y (as the
United States shareholder of the foreign purchasing corporation) 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 Parent, Parent Official,
and Outside CPA/Authorized Representative explain the circumstances that resulted in
the failure to timely file the valid Election. The information establishes that the request
for relief was initiated before the failure to make the regulatory election was discovered
by the Internal Revenue Service, that Parent reasonably relied on a qualified tax
professional, and that the interests of the government will not be prejudiced if relief is
granted. See §§ 301.9100-3(b)(1)(i) and (v).

       Based on the facts and information submitted, including the representations
made, we conclude that Parent and Sub Y 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, provided that an election under
§ 338(g) has been made regarding the acquisition of Target 2, 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 Sub Y, the
United States shareholder of the foreign purchasing company) to file the Election with
respect to the acquisition of Target 4.
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       The above extension of time is conditioned on the taxpayers’ (Parent’s
consolidated group’s, Purchaser’s, and Target 4’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). 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 (as common parent of the consolidated group which includes Sub Y)
should file the Election in accordance with § 1.338-1(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 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. Parent must amend its consolidated
return for its first taxable year following the acquisition to attach a copy of this letter and
the election form (and any information required therewith) and to show that the
acquisition was reported as a § 338 transaction. Also, Parent must file a “final return”
for Target 4 (if and as applicable) reporting the acquisition as a § 338 transaction and
attach thereto a copy of this letter and the election form. See §§ 1.338-1(e) and (g).

        No opinion is expressed as to: (1) whether the acquisition of the stock of Target
4 qualifies as a "qualified stock purchase"; (2) whether the acquisition of the stock of
Target 4 qualifies for § 338(a) treatment; or (3), if the acquisition of the stock of Target 4
qualifies for § 338(a) treatment, as to the amount of gain or loss recognized (if any) by
Target 4 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(s) who requested it. Section
6110(k)(3) provides that it may not be used or cited as precedent.

       Pursuant to the power of attorney on file in this office, a copy of this letter is
being sent to Outside CPA/Authorized Representative.
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                Sincerely yours,


                Assistant Chief Counsel (Corporate)