PLR 200052020: Buyer and seller get more time for a section 338(h)(10) election

Plain-English summary

A corporate buyer and the seller of an S corporation intended to elect to treat a stock purchase as an asset purchase under IRC § 338(h)(10), but missed the filing deadline. They relied on tax professionals to file the election and discovered the omission after it was due. The IRS found they had acted reasonably and in good faith and that an extension would not prejudice the government. It granted 30 days to file a new Form 8023, subject to required signatures, consistent tax reporting, and returns or amended returns within 120 days. The IRS did not determine whether the purchase actually qualified for § 338(h)(10) treatment.

Ruling snapshot

• Question: May the buyer and seller file their joint § 338(h)(10) election after the deadline?
• Outcome: Approved, with filing and tax reporting 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

Number: 200052020
Washington, DC 20224
Release Date: 12/29/2000
Index Number: 0338.01-02 Person to Contact:
9100.07-00
Telephone Number:

Refer Reply To:
CC:CORP:5 - PLR 108032-00
Date:
September 27, 2000

LEGEND

Parent
=

Purchaser =

Seller
=

Target
=

Date A
=

Date B
=

Date C
=

Date D
=

Y
=

Business X =

Company Official =
.
Outside Tax
Professional =

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This responds to your letter dated April 3, 2000, requesting, on behalf of the taxpayers identified above, an extension of time under § 301.9100-1 through 301.9100- 3 of the Procedure and Administration Regulations to file an election. Parent (as the common parent of the consolidated group of which Purchaser is a member) and Seller are requesting an extension to file a “§ 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 Regulations, with respect to Purchaser’s acquisition of the stock of Target (sometimes hereinafter referred to as the “Election”), on Date B. All citations in this letter to regulations under §338 are to the regulations as in effect for Date B. Additional information was submitted in letters dated May 28 and September 10, 2000. The material information is summarized below.

Parent is the common parent of a consolidated group that has a calendar taxable year and uses an accrual method of accounting. Purchaser is a wholly owned subsidiary of Parent and is included in Parent’s group. Parent’s group includes approximately Y subsidiaries, and the group is engaged in Business X.

Prior to the acquisitions, Target was an S corporation, within the meaning of § 1361, that was wholly owned by Seller.

On Date A, Parent and Seller entered into a stock purchase agreement for Parent to acquire all of Seller’s stock of Target for cash. On Date B, Parent assigned to Purchaser, and Purchaser assumed, all of Parent’s rights and obligations under the stock purchase agreement. Seller consented to the assignment, but Parent remained obligated to Seller under the stock purchase agreement. Also on Date B, Purchaser acquired all of the stock of Target from Seller, pursuant to the stock purchase agreement, in a fully taxable acquisition. It is represented that: (1) Parent is not (and was not at all times relevant) related to Seller within the meaning of § 338(h)(3); (2) Purchaser’s acquisition of all of the outstanding stock of Target qualified as a “qualified stock purchase” as defined in § 338(d)(3); and (3) Seller will not report gain on the transaction under the installment method of § 453(a). Following the acquisition, “new” Target was included in Parent’s consolidated return.

Parent and Seller intended to file the Election. The Election was due on Date C, but for various reasons it was not filed. On Date D (which is after the due date for the Election), Company Official and Outside Tax Professional discovered that the Election was not filed. The period of limitations on assessment under § 6501(a) has not expired for Parent’s, Seller’s, or Target’s taxable year in which the acquisition/sale was consummated, the taxable year in which the Election should have been filed, or for any taxable year(s) that would have been affected by the Election had it been timely filed.

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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(a) 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.

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 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 in 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.

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. 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 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

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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 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. 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 Seller to file the Election, provided Parent and Seller show 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.

Information, affidavits, and representations submitted by Parent, Seller, Company Official, and Outside Tax Professional explain the circumstances that resulted in the failure to timely file the valid Election. The information also establishes that tax professionals were responsible for the Election, that Parent and Seller relied on the 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 made, we conclude that Parent 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

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issuance of this letter, for Parent and Seller to file the Election with respect to the acquisition of Target, as described above.

The above extension of time is conditioned on (1) the filing, within 120 days of the issuance of this letter, of all returns and amended returns (if any) necessary to report the transaction in accordance with the election; and (2) the taxpayers' (Parent’s, Purchaser’s, Seller’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' liability is lower. Section 301.9100-3(c). The above extension is also conditioned on: (i) Parent and Seller signing the Election, and (ii) Parent and Seller treating the acquisition/sale of the stock of Target as a § 338(h)(10) transaction.

Parent 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. A copy of this letter should be attached to the election form. Parent and Seller must file or amend their returns, as applicable, for the year in which the transaction was consummated to report the acquisition/sale as a § 338(h)(10) transaction, and to attach thereto a copy of this letter and a copy of the election form. However, if Parent and/or Seller have already reported the transaction as a § 338(h)(10) transaction, then they must merely amend their returns to attach thereto a copy of the Election and a copy of this letter. Pursuant to § 1.338(h)(10)-1(e)(2)(iv), Target’s S election is not terminated. Accordingly, Target is not required to file an S short year return (i.e., a year that ended the day before the acquisition) nor a one day short return as a non-affiliated C corporation.

We express no opinion as to: (1) whether the acquisition/sale of Target’s stock qualifies as a "qualified stock purchase" under § 338(d)(3); (2) whether the acquisition/sale of Target’s stock qualifies for § 338(h)(10) treatment; or (3), 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 and deemed liquidation.

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

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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.

A copy of this letter is being sent to Company Official and Parent’s authorized representative, pursuant to the power of attorney on file in this office.

Sincerely yours,

Associate Chief Counsel (Corporate)

By
Ken Cohen
Acting Chief, Branch 3