PLR 200036028: Parent gets extra time to elect asset sale treatment for stock purchase

Plain-English summary

A U.S. consolidated group's subsidiary bought the stock of a foreign corporation. The group intended to make a section 338(g) election to treat the stock purchase as an asset purchase, and reported the deal as though it had made the election, but missed the filing deadline. The IRS found that the parent had acted reasonably and in good faith and that relief would not prejudice the government. It gave the parent 30 days from the letter's issue date to file a new election on Form 8023. The extension depended on the affected taxpayers' aggregate tax liability for the relevant years being no lower than if the election had been timely. The IRS did not decide whether the purchase qualified for section 338 treatment or what gain or loss the target would recognize.

Ruling snapshot

• Question: Could the parent file its section 338(g) election after the regulatory deadline?
• Outcome: Approved: 30 additional days to file, subject to the stated aggregate tax liability condition.
• Key authorities: IRC § 338(g); Treas. Reg. §§ 1.338-1(d), 301.9100-1, and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Index Number: 0338.01-02 Washington, DC 20224 9100.06-00
Number: 200036028
Person to Contact:
Release Date: 9/8/2000 Telephone Number:

Refer Reply To:
CC:DOM:CORP:2-PLR-101766-00
Date:
June 6, 2000

LEGEND:

Parent
=

Purchaser =

Seller
=

Target
=

Company Official =

Outside Tax
Professionals =

Authorized
Representatives =

Business A =

Business B =

Date A
=

Date B
=

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Date C
=

Dear

This letter responds to your letter dated January 3, 2000, requesting an extension of time under §§ 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations to file an election. The extension is being requested by Parent (as common parent of the consolidated group of which Purchaser is a member) to file an election under § 338(g) of the Internal Revenue Code and § 1.338-1(d) of the Income Tax Regulations, with respect to Purchaser’s acquisition of the stock of Target (sometimes hereinafter referred to as the “Election”), on Date A (All citations in this letter to regulations under § 338 are to the regulations as in effect on Date A). Additional information was received in letters dated February 15, March 14, and April 10, 2000. The material information submitted for consideration is summarized below.

Parent is the common parent of a consolidated group that files its return on the basis of a 52-53 week year ending on the Saturday nearest November 30, and that uses the accrual method of accounting. Purchaser is a wholly owned subsidiary of Parent and is included in Parent’s consolidated federal income tax return. Target is a wholly owned subsidiary of Seller. Target and Seller are foreign corporations (the country of formation and residency is set forth in the above redacted legend), and it is represented that Seller is not a United States shareholder, as defined in § 951(b). Purchaser is engaged in Business A and Target is engaged in Business B.

Prior to the acquisition, Target and Seller did not file U.S. income tax returns and they were not subject to U.S. income taxation. Further, Target was not: (1) a controlled foreign corporation within the meaning of § 957(a); (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 U.S. income tax return.

On Date A, Purchaser acquired all of the Target stock from Seller, for cash, in a fully taxable transaction. After the acquisition, “new” Target was included in Parent’s first return subsequent to the acquisition, by being listed on Form 5471 (Information Return with Respect to a Foreign Corporation). Parent and Target reported the transaction as if a valid election had been made for their taxable year in which the transaction was consummated. It is represented that: (1) Purchaser was not related to Seller within the meaning of § 338(h)(3); and (2) Purchaser’s acquisition of the stock of Target constituted a “qualified stock purchase” within the meaning of § 338(d)(3).

Parent intended to file the Election. The Election was due on Date B. However, for various reasons the Election was not filed. On or about Date C (which is after the due date for the Election), Company Official discovered that the Election had not been made. Subsequently, this request was submitted, under § 301.9100-1, for an extension of time

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to file the Election.

It is represented that the period of limitations on assessments under § 6501(a) has not expired for Parent’s, Purchaser’s or Target’s taxable year(s) in which the acquisition occurred, the taxable year 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. It is also represented: that the Service has not discovered that the Election has not been filed; and that the taxable year in which the acquisition was consummated, the taxable year in which the Election was due, or any taxable years that would have been affected by the Election had it been timely filed, have not been audited.

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.

Section 338(h)(3)(A) provides that the term "purchase" 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 1.1502-77(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.

Section 301.9100-1(b) defines the term "regulatory election" as including an election

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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 to file the Election, provided Parent 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 Parent, Purchaser, Company Official, Outside Tax Professionals, and Authorized Representatives explain the circumstances that resulted in the failure to file a valid Election. The information establishes that competent tax professionals were responsible for the Election, that they were aware of all relevant facts, and that Parent relied on them to make the Election. The information also establishes that the applicable returns were filed as if the Election was made, and that the failure to make the Election has not been discovered by the Service. Finally, the information also establishes 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 that have been made, we conclude that Parent has established that it 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 Parent to file the Election with respect to the acquisition of the Target stock, as described above.

The above extension of time is conditioned on the taxpayers’ (i.e., Seller’s, Parent’s, Purchaser’s, and Target’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' tax liability is lower. Section 301.9100-3(c).

Parent should file the Election in accordance with § 1.338-1(d). That is, a new

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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. A copy of this letter should be attached to the election form. Parent, Purchaser and Target, should file, or amend, their applicable returns to report the acquisition as a “section 338 transaction,” and to attach a copy of Form 8023 and a copy of this letter.

No opinion is expressed as to: (1) whether Purchaser's acquisition of Target stock qualifies as a "qualified stock purchase," (2) whether the acquisition of Target stock qualifies for § 338(a) treatment, and (3) if the acquisition of Target stock qualifies for § 338(a) treatment, as to the amount of gain or loss recognized (if any) by Target on its 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 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 ruling is directed only to the taxpayer(s) requesting it. Section 6110(k)(3) of the Code 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 your Authorized Representative.

Sincerely,
Philip J. Levine
Assistant Chief Counsel (Corporate)