PLR 200116013: More time for joint section 338(h)(10) election

Plain-English summary

A corporate buyer's parent and the seller intended to elect section 338(h)(10) treatment for the buyer's purchase of a subsidiary, but their joint election was not filed by the regulatory deadline. The IRS found that the taxpayers had relied on tax professionals, acted reasonably and in good faith, and would not prejudice the government. It granted 30 days to file a new election. The relief required related returns or amended returns within 120 days and barred an aggregate tax benefit from the late filing compared with a timely election. The IRS did not decide whether the stock purchase or transaction otherwise qualified for section 338(h)(10) treatment.

Ruling snapshot

• Question: Could the buyer's parent and seller file their joint section 338(h)(10) election after the deadline?
• Outcome: Approved for 30 days, subject to return-filing and tax-liability 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: 200116013
Washington, DC 20224
Release Date: 4/20/2001
Index Number: 9100.07-00, 0338.01-02 Person to Contact:

Telephone Number:

Refer Reply To:
CC:CORP:B05- PLR-113224-00
Date:
In Re: January 8, 2001

LEGEND:

Parent
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Purchaser
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Sub
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Seller
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Target
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State W
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State X
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State Y
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State Z
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Date A
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Date B
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Date C
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Parent’s Company Official =

Purchaser’s Company Official =

Sub’s Company Official and Tax =
Professional

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Seller’s Company Official =

Seller’s Tax Professional =

Authorized Representatives =

This is in response to a letter dated June 30, 2000, submitted on behalf of the above taxpayers, 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 the common parent of the consolidated group of which Purchaser is a member) and Seller are requesting the 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 (the “Election”), with respect to Purchaser’s acquisition of Target stock 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 submitted in a letter dated October 27, 2000. The information submitted for consideration is summarized below.

Parent, a State X corporation, is the common parent of a consolidated group.
Purchaser, a State Y corporation, is a wholly-owned subsidiary of Parent, and is included in Parent’s consolidated return. Sub, a State X corporation was a subsidiary within Parent’s consolidated group and was responsible for preparing and filing the consolidated tax returns.

Seller, a State W corporation, is the common parent of a consolidated group.
Target, a State Z corporation, was a wholly-owned subsidiary of Seller. Target was included in Seller’s consolidated return until consummation of the transaction described below. Target did not have any subsidiaries.

On Date A, Purchaser and Seller entered into a Stock Purchase Agreement that provided for Purchaser to purchase all the outstanding stock of Target from Seller. Also on Date A, pursuant to the Stock Purchase Agreement, Purchaser acquired all of Seller’s Target stock for cash in a fully taxable acquisition. It is represented that (i) neither Parent nor Purchaser were related to Seller within the meaning of § 338(h)(3), and (ii) Purchaser’s acquisition of Target stock qualified as a “qualified stock purchase,” as defined in § 338(d)(3).

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

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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 the selling affiliate or the 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 1.338-2(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 1.1502-77(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 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.

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Information, affidavits, and representations submitted by Sub’s Company Official and Tax Professional, Parent's Company Official, Seller’s Tax Professional, Seller’s Company Official and Authorized Representatives explain the circumstances that resulted in the failure to timely file a valid Election. The information also establishes that tax professionals were responsible for the Election, that Parent and Seller relied on them 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 that 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 issuance of this letter for Parent (as the common parent of the consolidated group that includes Purchaser) 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 consolidated group’s and Seller's consolidated group’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 upon audit of the Federal income tax returns involved. Further, we express no opinion 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 and Seller must file the Election in accordance with § 338(h)(10)-1(d) (i.e., 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). 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.

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 and character of gain or loss, if any, recognized by Target and Seller on Target's deemed asset sale and deemed liquidation.

In addition, we express no opinion as to the tax consequences of filing the

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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, all essential facts are subject to verification. 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 with this office, copies of this letter are being sent to Parent’s Company Official and to Purchaser’s other authorized representative.

Sincerely yours,
Associate Chief Counsel (Corporate)
By:
Chief, Branch 5