PLR 200105043: IRS grants extra time to make section 338(g) elections

Plain-English summary

A corporate group asked for more time to file section 338(g) elections after a foreign subsidiary acquired two foreign target corporations. The elections were due earlier, but the group discovered the missed deadline after relying on a qualified tax professional. The IRS granted an extension until 30 days after the letter's issuance because the taxpayers acted reasonably and in good faith and the government would not be prejudiced. The relief was conditioned on filing necessary returns within 120 days and ensuring that the group's aggregate tax liability for the affected years would not be lower than it would have been with a timely election, taking the time value of money into account.

Ruling snapshot

• Question: May the corporate group file its section 338(g) elections late after missing the regulatory deadline?
• Outcome: Approved, subject to filing and tax-liability conditions.
• Key authorities: IRC § 338(g); §§ 301.9100-1 through 301.9100-3; Treas. Reg. §§ 1.338-1(d), 1.338-1(g).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200105043
Washington, DC 20224
Release Date: 2/2/2001
Index Number: 0338.01-02, 9100.06-00 Person to Contact:

Telephone Number:

Refer Reply To:
CC:CORP:3 - PLR-115352-00
Date:
November 1, 2000

Parent
=

Target 1
=

Target 2
=

Sub X
=

Sub Z
=

Seller
=

State A
=

Country B =

Date A
=
Date B
=
Date C
=

Outside CPA =

Parent Official =

This responds to your authorized representative’s letter dated August 1, 2000, submitted on your behalf, 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 X, the United States shareholder of Sub Z, the foreign purchasing company is a member) is requesting an extension to file an election under § 338(g) of the Internal Revenue Code with respect to the acquisition of Target 1 and Target 2 (hereinafter such election is referred to as 2 PLR-115352-00

"the Election"). All citations in this letter to regulations under § 338 are to the regulations as in effect for Date A. 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. Parent has a taxable year ending December 31 and uses the accrual method of accounting.

Sub X owns 100 percent of Sub Z, a corporation incorporated under the laws of Country B. Sub Z is a corporation incorporated under the laws of Country B. Sub Z is not engaged in the conduct of a trade or business within the United States. Target 1 and Target 2 are corporations formed under the laws of Country B. Prior to its acquisition by Sub Z, the stock of Target 1 and Target 2 was owned by Seller, a Country B corporation.

Neither Target 1 nor Target 2 was (1) a controlled foreign corporation within the meaning of § 957(a); (2) a passive foreign investment company for which a § 1295 election was in effect; (3) a foreign investment company or a foreign corporation 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, Sub Z purchased all of the outstanding shares of Target 1 and Target 2. Prior to making the purchase, Parent determined that it would file an election pursuant to the provisions of § 338(g) to treat the acquisition of the stock of Target 1 and Target 2 as the purchase of the assets of Target 1 and Target 2.

It has been represented that (1) the Target 1 and Target 2 stock was acquired for cash in fully taxable transactions; (2) neither Parent nor any members of the Parent affiliated group was related to the Target 1 or Target 2 shareholders within the meaning of § 338(h)(3); and (3) the acquisitions of the stock of Target 1 and Target 2 by Sub Z were "qualified stock purchases" within the meaning of § 338(d)(3).

The Election was due for Target 1 and Target 2 on Date B. However, for various reasons the Election was not filed on the applicable due date. On Date C (which is after Date B), Outside CPA 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 acquisitions occurred, the taxable years 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- 3 PLR-115352-00

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.

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(c)(1) provides that the purchasing corporation may make an election under § 338 for target even though target is liquidated on or after the 4 PLR-115352-00

acquisition date. Section 1.338-2(c)(2) provides that an election may be made for target after the acquisition of assets of the purchasing corporation by another corporation in a transaction described in § 381(a), provided that the purchasing corporation is considered for tax purposes as the purchaser of the target stock. The acquiring corporation in the § 381(a) transaction may make an election under § 338 for target. 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.

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. 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 X, the United States shareholder of the foreign purchasing corporation) to file the Election, provided that Parent shows that Sub X (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 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 5 PLR-115352-00

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 X 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 issuance of this letter, for Parent (as the common parent of the consolidated group that includes Sub X, the United States shareholder of the foreign purchasing company) to file the Election with respect to the acquisitions of Target 1 and Target 2.

The above extension of time is conditioned on (1) the filing, within 120 days of the issuance of this letter, all returns and amended returns (if any) necessary to report the transaction in accordance with the Election; and (2) the taxpayers' (Parent's consolidated group’s, Sub Z’s, Target 1’s and Target 2'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 contains Sub X) 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 acquisitions to attach a copy of this letter and the election form (and any information required therewith) and to show that the acquisitions were reported as § 338 transactions. Also, Parent must file a “final return” for Target 1 and Target 2 (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 acquisitions of the stock of Target 1 or Target 2 qualify as "qualified stock purchases"; (2) whether the acquisitions of the stock of Target 1 or Target 2 qualify for § 338(a) treatment; or (3), if the acquisitions of the stock of Target 1 or Target 2 qualify for § 338(a) treatment, as to the amount of gain or loss recognized (if any) by Target 1 or Target 2 on the deemed asset sales.

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, 6 PLR-115352-00

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.

A copy of this letter is being sent to Parent, pursuant to the power of attorney on file in this office.

Sincerely yours,
Associate Chief Counsel (Corporate)
By:
Acting Chief, Branch 3