PLR 200037043: Extension granted for late stock purchase election

Plain-English summary

A corporate buyer and the sellers of an S corporation intended to make a joint section 338(h)(10) election after a stock purchase, but missed the filing deadline. The IRS found that they had relied on a qualified tax professional, acted reasonably and in good faith, and sought relief before the IRS found the error. It granted them 30 days from the letter date to file a new Form 8023. Relief depends on their signing and treating the transaction consistently with the election, and on the late filing not lowering their combined tax liability compared with timely filing. The IRS did not decide whether the purchase qualifies for section 338(h)(10) treatment or what gain the target might recognize.

Ruling snapshot

• Question: May the buyer and sellers file their joint section 338(h)(10) election after the deadline?
• Outcome: Approved: a 30 day extension, subject to the stated conditions.
• Key authorities: IRC § 338(h)(10); Treas. Reg. §§ 1.338(h)(10)-1(d), 301.9100-1, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Index Number: 9100.07-00, 338.01-02 Washington, DC 20224

Number: 200037043
Person to Contact:
Release Date: 9/15/2000
Telephone Number:

Refer Reply To:
CC:DOM:CORP:3- PLR-108321-00
Date:
June 20, 2000

Parent
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Purchaser
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Target
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Sellers
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Business X
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Business Y
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State M
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State N
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Date A
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Date B
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Date C
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Target’s Outside Professional =

Purchaser’s Outside Professional=

Purchaser’s Company Officials =

Target’s Company Official =

This in response to a letter dated April 6, 2000, submitted by your authorized representative, requesting an extension of time to make a joint election pursuant to §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations. Additional information was submitted on June 1, 2000. All citations in this letter to regulations under § 338 are to the regulations as in effect for Date A. The material information submitted for review is summarized below.

Parent (as common parent of the consolidated group of which Purchaser is a member) and Sellers request an extension to file a “§ 338(h)(10) election” pursuant to § 338(h)(10) of the Internal Revenue Code and § 1.338(h)(10)-1(d) of the Income Tax Regulations (the “Election”), regarding Purchaser’s acquisition of Target on Date A.

Parent is the common parent of a consolidated group and Purchaser is a member of the group. Purchaser is incorporated in State M and is engaged in Business X. Target is incorporated in State N and has elected to be treated as an S corporation for Federal income tax purposes. Target is engaged in Business Y. Sellers own all of the Target stock.

On Date A, Sellers and Purchaser entered into a Stock Purchase Agreement whereby Purchaser acquired all of the Target stock in exchange for cash and notes in a fully taxable transaction. It is represented that the stock purchase between Purchaser and Sellers is a “qualified stock purchase” as defined in § 338(d)(3). It is further represented that Purchaser and Sellers are not related within the meaning of § 338(h)(3). Sellers also represent that they will not elect installment sale treatment as defined under § 453. Furthermore, to the extent that installment sale treatment has already been utilized on Target’s and/or Sellers’ income tax returns that included the Date A transaction, corrective action shall be immediately taken to rescind such installment sale treatment and to report the full amount of gain resulting from the deemed sale of assets.

Parent and Sellers intended to make the Election. The Election was due on Date B. However, for various reasons the Election was not made. On Date C (after Date B), after realizing the Election was not made in a timely fashion, Purchaser’s

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Outside Professional, Target’s Outside Professional, Purchaser’s Company Officials and Target’s Company Official agreed to request “9100 Relief.”

The period of limitations on assessments under § 6501(a) has not expired for Parent’s, Target’s, or Sellers’ 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 “§ 338 election” under § 338(g), and (2) 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: (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), be attributed to the person acquiring such stock.

Section 338(h)(10) permits the purchasing and selling corporations to elect jointly 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 qualified stock purchase generally is 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 on 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 “qualified stock purchase” of the target corporation stock. Section 1.338(h)(10)-1(d)(3) provides 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.

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 corporation shareholders) on Form 8023 in accordance with the instructions to the form.

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The regulations further provide that the election must be made not later than the 15 th 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 and the common parent of the selling consolidated group (or selling affiliate or S corporation shareholders). The instructions provide that the form must be signed by a 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 for 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 6 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. 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 Parent and Sellers to file the Election, provided Parent and Sellers show that 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.

Affidavits, representations and information submitted from Purchaser, Target, Sellers and Purchaser’s and Target’s Outside Professionals explain the circumstances surrounding the failure to make the Election. This information also establishes that the taxpayers relied on a qualified tax professional, the request for relief was initiated

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before the failure to make the Election was discovered by the Internal Revenue Service, and that the government will not be prejudiced if relief is granted. See §§ 301.9100- 3(b)(1)(i)-(v).

Based on the facts and information submitted, and representations made we conclude the taxpayers have shown they acted reasonably and in good faith in failing to make the Election, the requirements of §§ 301.9100-1 and 301.9100-3 have been met, and granting relief will not prejudice the government. Therefore, an extension of time is granted under § 301.9100-1, until 30 days from the date of issuance of the letter for Parent and Sellers to file the Election with respect to the purchase of Target stock on Date A.

The above extension of time is conditioned on the fact it will not produce a lower tax liability for the Parent group, Target and Sellers, in the aggregate for all years to which the Election applies, than it would have been if the Election been timely made (taking into account the time value of money). A determination thereof will be made by the District Director’s office upon audit of the Federal income tax returns involved.

No opinion is expressed as to the taxpayers’ tax liability for the years 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). The above extension is also conditioned on: (i) Parent and Sellers signing the Election, and (ii) Parent and Sellers treating the acquisition/sale of Target stock as a § 338(h)(10) transaction.

Parent and Sellers 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.

A copy of this letter should be attached to the Election form. Parent and Sellers, having reported the acquisition as a “§ 338(h)(10)” transaction, must amend their applicable returns to attach a copy of the Election (and the information required therewith) and a copy of this letter.

We express no opinion regarding: (1) whether the acquisition/sale of Target stock qualifies as a “qualified stock purchase” under § 338(d)(3); (2) whether the acquisition/sale of Target stock qualifies for § 338(h)(10) treatment; or (3) if § 338(h)(10) is applicable, as to the amount of gain or loss, if any, recognized by Target on its deemed asset sale. In addition, we express no opinion 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 effects 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

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certain statements and representations. 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, if any, that would otherwise be applicable still 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 has been sent to your authorized representative.

Sincerely yours,

Philip J. Levine
Assistant Chief Counsel (Corporate)